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How To Use Open Interest To Increase Profitability

Most traders lose money in futures and options markets because they do not analyze open interest, which is an important indicator. Open interest refers to the total number of contracts outstanding and can help predict where prices may find support or resistance as option sellers look to defend their positions. Analyzing changes in open interest at different strike prices for calls and puts on a stock can provide insights into likely future price behavior and potential support and resistance levels. Examining examples of Adani Enterprises and Axis Bank demonstrates how open interest analysis correctly identified key price levels and helped predict short-term price movements and range-bound trading.

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Ravi Tomar
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29 views5 pages

How To Use Open Interest To Increase Profitability

Most traders lose money in futures and options markets because they do not analyze open interest, which is an important indicator. Open interest refers to the total number of contracts outstanding and can help predict where prices may find support or resistance as option sellers look to defend their positions. Analyzing changes in open interest at different strike prices for calls and puts on a stock can provide insights into likely future price behavior and potential support and resistance levels. Examining examples of Adani Enterprises and Axis Bank demonstrates how open interest analysis correctly identified key price levels and helped predict short-term price movements and range-bound trading.

Uploaded by

Ravi Tomar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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How to use Open Interest to increase profitability?

Most of the traders who trade in the futures market end up in losing money in the futures and options market.
The most common mistake they make is that they do not analyze the open interest. Open Interest is one of the
important parameters while trading in the futures market. If we start analyzing open interest with respect to
volume and price then the traders will have a high probability of success in their trades and also increase their
profitability in the futures and options market

Understanding Open Interest with respect to Volume

Open Interest is a statistic unique parameter while trading in futures and options market. Open Interest is the
total number of contracts which is presently in existence and is not offset by the closing of trades. Open
Interest is different than volume. Volume is the number of contracts traded per day.

If you are buying a future/option then you are opening a position and the person who sold you is also opening
a position. The volume is increased by one and open interest would also increase by one. If you sold your
future/option to someone else who did not have a position in the market then the volume will increase but the
open interest will not change as you have transferred the open interest to someone else that did not have any
position in the market earlier.

Open Interest would have decreased if you had sold the position to someone who already had a position in the
futures/options market. Since you are closing positions, open interest goes down where as the volume
increases by one.
How to analyze open interest data?

Open Interest is important for both stock futures traders as well as option traders. Open Interest shows up
where the traders are putting their money in. Therefore analyzing open interest is very important. Let’s analyse
the open interest data with the help of a stock in the futures market.

Due to the inherent time decay of premium of options, there are generally large numbers of option sellers in the
market. For option sellers, the profit is max the premium value of the option sold, while loss possibility is
unlimited. Hence these option sellers are generally very nimble-footed and agile to square off their positions in
case of any adverse movement.

Now if we observe in the market, we will find that the bullish players sell put options as they get premium if the
prices don’t go below the strike price. Similarly, the bearish players sell call options as they look out for gain if
the prices don’t go above the strike price.

If there is high build up in the open interest in any particular strike price of calls and puts of a stock, that means
market participants see those levels as potential support or resistance zones, depending on the option being
call or put.

Source: NSE Website

Suppose we take up a stock, say Adani Enterprises. We need to examine at which price the maximum open
interest is build up and whether in the call or in the put. We can get the option chain data of any particular stock
from the NSE website. In the example, the stock price was 123.80. The stock was already in an uptrend as we
can see from the below chart below. From this data table we can see that the maximum open interest is build
in the call at Rs. 130. Therefore there are possibilities that if Adani goes to 130, call sellers might want to
defend their position by creating more resistance around 130 levels. On the other hand, if price breaches the
130 level, the short covering of call writers can push the stock even higher. Let us see, what happened next.

As we can see after breaching the 130 mark, the stock temporarily took support around 130 and eventually
moved fast in an upward direction. Two days later we can see, call open interest at 130 has gone down due to
short covering, while there has been huge put addition in 130 strike making it a near term support. Also, we
can notice that now Adani has huge call build-up at 140 and a150 strike price. Hence if Adani goes higher,
price action and open interest behaviour in options around 140/ 150 will be crucial.

Source: NSE Website

Now let us another example:-


Let’s take up another stock, say Axis bank. In the example the stock price was Rs. 523.3. This stock is broadly
a range bound stock as we can see from the chart below. From this data table we can see that the maximum
open interest in Put side is build in the put at Rs. 500. Therefore there are possibilities that if Axis Bank goes
down to 500, put writers might want to defend their position by creating more support around 500 levels.
Similarly, we can see very large amount of open interest build-up in 530 and 540 calls. Hence there is a
possibility that the stock may remain broadly range-bound in the 500-540 range.

Let us see what happened next

We can see 4 days later that the stock still remained in the range, as could be predicted from OI data analysis.
If we look at the open interest data after 4 days we can see that OI remained more or less same in 500 puts
and 530 and 540 calls.
Source: NSE Website

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