What is Open Interest?

[vipin911]

Hi All,

Can anyone please tell me what exactly is open interest, What I understand is that open interest is the number of open positions left in the market on any given day but how does these open positions effect the market?

Like in yesterday's fall I read on CNBC TV-18.

"Nifty down 4.4%,OI up 4%."

What is the implication of this?

Thanks.

 

[paran]

Hi,

I searched the forum but I can't get the answer.

What should I interpret from "Open Interest"? For an example news is something like Sesa Goa adds 19 Lakhs shares in open interest. What does it mean? With the more number of open interest shares does the share price increase or decrease or doesn't matter? If it doesn't matter then why it has to be news?

Could someone clarify me.

Thanks.

 

[solar]

Open Interest (OI) is an indicator of market sentiment and trends or reversals.

If there is an increase in stock price with a corresponding increase in OI, it means that people are bullish and taking long positions.

If OI increases and price decreases, then it is indicative of people taking short positions, as they expect price to fall.

So, my understanding is, the change in OI has to be taken along with price change.

This article on HDFC Sec may be of some more help. Note that it's a pdf file.

 

[Rainman]

Hi All,

Can anyone please tell me what exactly is open interest, What I understand is that open interest is the number of open positions left in the market on any given day but how does these open positions effect the market?

Like in yesterday's fall I read on CNBC TV-18.

"Nifty down 4.4%,OI up 4%."

What is the implication of this?

Thanks.

Open Interest (OI) is number of open positions in FNO (long and short). It is easier to consider OI as a physical "contract". People can sell contracts they do not have.

Assume fresh position, OI = 0 (New Month Series)

A sells 1 FNO position to B, OI = 1 (A sold 1 "contract" to B. Total number of contracts = 1)

C sells 1 FNO position to B, OI = 2 (C sold B 1 "contract". B now has 2 contracts. Others have none)

B sells 1 FNO position to D, OI = 2 (B closes 1 long FNO position and D opens 1 long FNO position. Thus, OI remains unchanged. B sells one of his contract to D. B has 1 contract, D has 1 contract)

B sells 1 FNO position to A, OI = 1 (A & B reverse their first trade)

D sells 1 FNO position to C, OI = 0 (Month end unwinding of all open positions)

Index Up, OI up implies net long positions in FNO.
Index Down, OI up implies net short positions in FNO.
Index Up, OI down implies short covering in FNO.
Index Down, OI down implies long unwinding in FNO.

 

[ashish_jain11]

Hi,

I searched the forum but I can't get the answer.

What should I interpret from "Open Interest"? For an example news is something like Sesa Goa adds 19 Lakhs shares in open interest. What does it mean? With the more number of open interest shares does the share price increase or decrease or doesn't matter? If it doesn't matter then why it has to be news?

Could someone clarify me.

Thanks.

Open interest is only for derivatives (Futures and Options) and not for cash market.

Open interest is the number of options and/or futures contracts that are not closed or delivered on a particular day.

In other words at a particular time:

Total of Longs = Total of Shorts = Open Interest

There are two things we see in derivatives:

1. Open Interest
2. Volume

Let's understand this by an example.

Hope now it is clear.

 

[Alchemist]

Index Up, OI up implies net long positions in FNO.
Index Down, OI up implies net short positions in FNO.
Index Up, OI down implies short covering in FNO.
Index Down, OI down implies long unwinding in FNO.

There are never any net positions in derivatives market.

For every long position, there is a short position.

 

[solar]

Here's another analysis report (pdf) by HDFC Sec on change in OI with associated change in cost of carry.

The table on page 1 titled "A] Open Interest (OI) Analysis", might be useful.