By diligently tracking and interpreting open interest spurts, traders can infer potential market movements. For example, a sudden increase in the buying of put options by big players may indicate a bullish market sentiment. Conversely, an increase in selling can hint at a bearish outlook.
A well-informed strategy involves:
- Observing the Top Five: Buy the top five in the long buildup and sell the top five in the short buildup. Close positions when names drop from the top five.
- Theta and Expiry: Focus primarily on weekly options due to the significance of theta. Ensure positions align with the predicted direction of the market on expiry day.
- Synchronize with Price Action: Ensure that open interest data aligns with price action trends. For instance, a bullish breakout may be anticipated if there’s a significant buildup in put options.
In the dynamic world of stock trading, keen observers often come across the term “OI spurts.” Open Interest (OI) spurts refer to significant, sudden increases in Open Interest in the options market.
To grasp the implications of this phenomenon, one must first understand the concept of Open Interest.
This video gives a comprehensive overview –
OI Spruts/ Spikes in Open Interest -
What is Open Interest?
Definition: Open Interest (OI) represents the total number of outstanding contracts held by market participants at the end of a trading day. It is crucial in the futures market.
Measurement: OI measures the flow of money into the futures market. For every seller of a futures contract, there must be a buyer, meaning one seller and one buyer collectively create a single contract.
Daily Changes: The reported open interest position each day reflects the increase or decrease in the number of contracts for that day.
How is Open Interest Calculated?
Initiating a New Position: If both parties (a new buyer and a new seller) initiate a new position, open interest increases by one contract.
Closing an Existing Position: If both traders are closing an existing position, open interest will decrease by one contract.
Passing Off to a New Trader: If an old trader passes their position to a new trader, open interest remains unchanged.
The Significance of Monitoring Open Interest
Trend Confirmation: An increase in OI alongside an increase in price confirms an upward trend. Conversely, if OI increases and the price decreases, a downward trend is confirmed.
Trend Reversal Indicators: A leveling off or decline in open interest can often serve as an early warning of an end to the current trend.
Open Interest as a Confirming Indicator: A trend is solidified when there’s a rise in OI with a rise in price. On the flip side, an OI increase with a decrease in price signals a potential trend reversal.