What Does Open Interest Tell Us?

Apurva Sheth
Last time, I wrote about open interest - the sixth primary data point in the futures and options market after open, high, low, close, and volume data. Open interest is the total number of open futures or options contracts at any given point.

Open interest is different from volumes. Open interest measures the fresh flow of money into the security. Volume measures the level of trading activity in a security. You can refer to the previous article to understand both in detail.

Today, we will go one step further and see how to interpret open interest data along with price action. Open interest (OI) is available for both futures as well as options contracts. But OI data for futures contracts is only considered for analysis as the financial commitment is higher in futures than options.

Open interest is the number of open contracts in the futures segment. For each seller of a futures contract, there is a buyer of that contract. A seller and a buyer combine to create one contract. Hence, open interest is calculated by considering only one side - either buy or sell, but not both.

Where to Check Open Interest Data?



You can check the open interest data for individual contracts by going on NSE's website and typing the security name in the Equity Derivative section of the search box. The page that opens (shown above) will display all the details related to the futures contract of the security you typed. The open interest data is displayed at the bottom (marked in purple).

You can also download the bhavcopy file, which the exchange publishes on their all reports page daily after the market closes. This is an excel sheet that contains the open interest data for the futures and options securities traded on the exchange.

Price and Open Interest

One can monitor the changes in the open interest figures for all the listed securities at the end of each trading day. This can give meaningful insights along with other data. It has become a daily exercise for me before I write my End of the Day updates for Swing Trader.

An increase in open interest means fresh money is flowing into the security. This means that the ongoing trend (up or down) will continue.

A fall in open interest means the market participants are liquidating their positions. This means the prevailing price trend could come to an end.

But one cannot simply conclude that a rise in open interest is bearish or bullish. There is a buyer for every seller. So what can be seen as a fresh inflow of money supporting a trend could also be seen as more conviction against that trend. Hence, one should always look at open interest in combination with price.

Open interest can be a confirming indicator. An increase in open interest along with a rise in price confirms an uptrend and is considered bullish. This is termed 'long buildup'. Similarly, an increase in open interest along with a fall in price confirms a downtrend. It is termed 'short buildup'.

On the other hand, a decrease in open interest with a rise in price is generally considered weak as the rally is not supported by fresh inflow of money. The rise could be only because of profit booking by short sellers. This is termed 'short covering'.

A decrease in open interest with a fall in price is not considered weak as the fall is because of squaring up of positions by existing long holders to book profits. This is termed 'long unwinding'.

The table below summarises all four possibilities.

Price Open Interest Interpretation Termed As
Rising Increasing Strong uptrend Long Buildup
Falling Increasing Strong downtrend Short Buildup
Rising Decreasing Strong uptrendShort Covering
Falling Decreasing Strong downtrend Long Unwinding

I will write more about open interest and the other data points in the future. Meanwhile, it's raining IPOs this season. If you are wondering which one to apply to and which one to give a miss, then I have good news for you. You can download a special IPO report prepared by the research team over at Equitymaster. It has special focus on the insurance industry. So don't delay; download it today!

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4 Responses to "What Does Open Interest Tell Us?"
A
23 Sep, 2016
The NSE bhavcopy file doesn't provide previous day closing price for the contract. So it provides change in OI, but we cant see change in price in the same file. We need to get it form other file. And its a pain to reconcile the 2 data as number of entries in both differ each day. Any idea whether we can get both things in a single report on NSE website? Like 
Jaishankar J
23 Sep, 2016
Hi Apurva, Another eye opener for me. Earlier I had fears about Futures & Options because of its complexity, but you have broken the ice with simple, easy to understand English. Great. I'm sure there are some more jargons in F&O which your able guidance I'll be able to understand. Thanks a lot.Like 
Yogesh Joshi
21 Sep, 2016
Thanks Apurva, Though we know that It's very interesting to read the article written by you because the writing has Apurva's touch which simplifies most of the things. Keep sending. Regards, Yogesh Joshi Like (1)
joginder pal
21 Sep, 2016
well taught. thank you for making future option clear so easily. It was always confusing for me.Like 
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