“Open interest is like a window into the soul of the market – it shows us who’s buying, who’s selling, and who’s just standing by the sidelines, waiting to see what happens next.”
Open interest is a term that is often used in the world of options trading.
It refers to the total number of outstanding derivative contracts i.e futures or options contracts that are currently outstanding and have not yet been closed or settled.
Here are some key points to understand about open interest:
Open interest is an important indicator of market activity, as it provides insight into the level of interest and liquidity in a particular options contract.
Sure, here’s an example story of options trading with Tata Motors of how open interest works in practice:
Tata Motors, one of the largest automobile manufacturers in India, has been in the news recently due to a surge in its stock price. Let’s say we are tracking the open interest (OI) for its call and put options for five consecutive trading days.
Here is the table with the above information provided:
|Day||Activity||Call OI||Put OI||Change in Call OI||Change in Put OI|
|1||A trader buys 1000 Tata Motors call options with a strike price of 400 and a premium of 20.||1000||0||+1000||0|
|2||Two traders buy 500 Tata Motors put options each with a strike price of 380 and a premium of 15.||1000||1000||0||+1000|
|3||Three traders sell 200 Tata Motors call options each with a strike price of 420 and a premium of 25.||800||1000||-200||0|
|4||Four traders sell 300 Tata Motors put options each with a strike price of 360 and a premium of 10.||800||700||0||-300|
|5||Two traders buy 1000 Tata Motors call options each with a strike price of 440 and a premium of 30.||1800||700||+1000||0|
In this example, we can see that the call and put OI fluctuated over the five days depending on the buying and selling activity.
Volume is another important metric that is closely related to open interest in the world of trading. It represents the total number of shares or contracts traded during a particular trading day or time period. It helps traders to gauge the level of interest and activity in a particular stock or market, and can be used in combination with open interest to form a more complete picture of market sentiment.
Here are some key points to keep in mind about volume and its relationship to open interest:
Key Example of Open Interest and Volume Comparison:
In the context of the previously shared example story of Tata Motors, Here is a table comparing volume and open interest:
Volume vs Open Interest:
While both open interest and volume are related to trading activity, they are different in their interpretation and significance.
|Definition||Total number of contracts traded in day||Total number of outstanding contracts in market|
|Time Frame||Usually Calculated for each trading day||Usually Changes are tracked across multiple days|
|Relevance||Volume is generally more relevant in all markets, including stocks, bonds, and commodities.||Open interest is generally more relevant in options and futures markets|
|Significance||Volume reflects the level of buying and selling activity in the market.||Open interest reflects the level of market activity.|
|Interpreting Change||Volume provides insights into the market’s direction and can help identify trends.|
A high volume but low open interest could mean the trades were primarily intraday trades
Open interest can give traders an idea of the level of participation in the market.