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CAPITAL MARKET

MEANING OF OPEN INTEREST

Open Interest also know as OI, is the total number of options and futures  contracts that are not closed on a particular day. As you might be aware of  volume in a particular stock in equity market, option trading involves the  creation of a new option contract when a trade is placed. Open interest
will tell you the total number of option contracts that are currently open.

Open Interest is mostly used to confirm a trend for a particular futures  contract, For eg, lets look at Reliance 1000 May CALL, the open interest  might tell us that there have been 5 options open in the month of May, a  trader might then wonder does this refer to the number of contracts bought or sold.

*Working*
When a trader buy’s or sell’s an option, the transaction needs to be  entered as either an opening or a closing transaction. If he buy’s 5  RELIANCE May 1000 CALL, he is buying the calls to ‘open’, i.e he is opening  his position in a futures contract, which causes the Open interest to rise  by 5, and then after sometime(within) the month he decides to sell his  contract i.e close his position in a particular contract, then he is  causing the open interest to go down by 5.

Open interest applies primarily to the futures market, it helps the measure  the flow of money into the futures Market. For each seller of a futures  contract (eg RELIANCE 1000 CALL) there must be a buyer of that contract.  Thus a seller and a buyer combine to create only one contract.

A rise in open interest in a futures contract along with its price  indicates bullishness, which means investors are creating long positions  and vice versa.

The open interest position that is reported each day represents the  increase or decrease in the number of contracts for that day, and it is  shown as a positive or negative number.

*Advantages of monitoring Open Interest*
Changes in the Open Interst as mentioned earlier can help a trader  interpret the future trend of a particular contract.

*Open Interest RISING ->* Indicates that the present trend (up, down, flat)  will continue

*Open Interest FALLING->* Indicates that the prest trend(up, down, flat) is  likely to change or is coming to and end.

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