Open Interest | Meaning, How It Works, and Example

My friend remembered his first trading experience where he bought one of the stocks that was rising, but suddenly it started to fall.

He asked how it happened. Then I replied duet Open Interest, then my friend asked what Open Interest is, then I replied Open Interest is a particular contract that is actively traded in an asset where prices are rising or falling.

Here we’ll discuss in detail so you can understand better, and it will help you to check the status of whether stock trading is rising or falling

Quick Summary

Open Interest (OI) is the total number of outstanding contracts (futures or options) that are still open in the market. It shows how many traders are holding a position without closing it. In simple words, OI tells us about the market’s activity and participation.

A rise in open interest indicates new money coming into the market, which reflects more demand and stronger trends, while declining open interest indicates traders are closing positions, which suggests a weakening trend. 

Our Focus in the Article

• What is Open Interest and How does it work?

• Significance of Open Interest and Its Importance 

• Some Examples of Open Interest and How to Use 

• Difference between Open Interest and Trading Volume

What is Open Interest?

Open Interest means the total number of contracts in futures or options that are still active and not closed. It shows how many people are holding a position in the market.

Investors can use OI data analysis to get an understanding of the activity within the market, as well as help them identify whether money is entering or exiting a trend.

If Open Interest is high, this means that more traders are interested in that contract. In simpler words, High open Interest options show strong market participation and activity. It helps us understand the trend, whether traders are building new positions or closing old ones. 

Understanding Open Interest

Open Interest is a very important concept in the futures and options (F&O) market. It tells us how many contracts are still “open” or active. These are the contracts that traders have entered into but not yet settled or closed.

For options trading, open interest is very important because it helps traders understand liquidity, market direction, and the strength of price moves. 

A high open interest in options indicates active participation and better opportunities for entry and exit.

How Does an Open Interest Work?

Open Interest (OI) refers to the total number of contracts (options or futures) that are currently active in the market, meaning that they have not been closed or settled. 

OI will increase when a new contract is created, and decrease when a trader is no longer in that position. 

Understanding OI meaning in share market can help traders measure the amount of participation in the market and the strength of current trends.

Open interest also decreases when buyers and sellers close out more positions than the number of open positions for that day.

However, open interest will increase again when investors and traders open new long positions, or sellers take on new short positions in an amount greater than the number of contracts that were closed that day.

What Happens When OI Increases?

Generally, OI indicates a new entry of stock prices that is likely to behave in the trading environment.​

An increase in OI may come with more contracts being opened, a continuation of the trend (for the asset price), and also a confirmation of the trend strength/bullish market activity. It could suggest stronger buying pressure as well.

More open interest (OI) typically means better liquidity in the market and greater ease to exit or enter positions. If the increase in OI is coupled with an increase in trading volumes, it may signify greater market volatility.

Significance of Open Interest

Open Interest is significant because it indicates the number of contracts, such as options or futures, still open in the market that have not yet been closed out. 

This amount is reflective of how popular the contract is and is indicative of how easy or difficult it may be to either buy or sell in the market. 

Why Open Interest Matters

If open interest is high, it means lots of people are trading those contracts. This usually makes it easier for traders to enter or exit trades at fair prices because there are many buyers and sellers—this is called good liquidity.

By watching changes in open interest, traders can see if a market trend is strong or weak. Higher open interest with rising prices often signals a strong uptrend, while falling open interest can mean the trend is slowing down.

When open interest goes up, it means new money is coming into the market and traders are interested. If open interest goes down, it means traders are leaving and the market for that contract is cooling off.

Certainly! Higher open interest is often a positive sign, but its meaning depends on the situation. Here’s a simple, thorough explanation for readers:

What Higher Open Interest Really Means

• Market Participation: High open interest shows that lots of traders have open positions in that contract, such as futures or options. It means people are interested and committed, not just trading for a short time.

When Higher Open Interest May Not Be "Better"

• Possible Reversals: Sometimes, very high open interest means the market is crowded. If many traders are on the same side, a sudden news event could cause everyone to rush out at once, leading to sharp price changes.

Examples

• In a busy options contract, open interest increases as new traders join the trend—this suggests the trend is supported by fresh money and interest.

• If a contract’s price rises but open interest is falling, it may mean traders are closing out positions—a possible warning that the trend is ending.

Liquidity and Smooth Trades: When many contracts are open, there are more buyers and sellers in the market. This makes it easy to buy or sell without affecting the price too much, leading to fairer prices and less risk of sudden price jumps.

Confidence in Trends: If open interest is rising along with price, it often means the current trend is strong—a lot of traders believe in it, so the price trend is likely to continue. 

Through OI data analysis, traders can better understand market sentiment and predict possible trend changes.

Not a Standalone Signal: Open interest by itself doesn’t guarantee profits or losses. It works best as a clue when combined with other things traders watch, like price movements and trading volume.

Certainly! Higher open interest is often a positive sign, but its meaning depends on the 

Is Open Interest (OI) Bullish or Bearish?

An analysis of OI does not indicate bullishness or bearishness by itself. It is indicative of the number of contracts or options, or futures that are active in the market at that time.  To know if of the market sentiment of the market is bullish or bearish, we need to analyze OI along with price. 

1. Rising Price with Rising OI – Indicates Bullish Trend (Fresh Buying)

In cases where both the price of an asset and OI increase, it implies new long positions are being formed. The traders are upbeat and buying contracts based on the expectation that the market can be expected to rise.

Example: Nifty moves from 20,000 to 20,200 while OI rises from 1 lakh to 1.2 lakh. This shows strong bullish sentiment among market participants.

2. Falling Price with Rising OI – Indicates Bearish Trend (Fresh Selling / Short Build-up)

When price is declining and OI is rising, it indicates that new short positions are being established. Hawkes are aggressively selling in expectation of a further drop in prices.

Example: Bank Nifty drops from 46,000 to 45,600 while OI increases. This reflects bearish pressure in the market.

3. Rising Price with Falling OI – Indicates Short Covering (Bullish Sign)

In such a situation, the price increases and OI drops. It occurs when traders who have short positions liquidate the trades by purchasing back the contracts, and the price is forced to rise.

Example: Reliance Futures rises from ₹2,400 to ₹2,450 while OI drops. This is a short covering rally, often seen as a bullish sign.

4. Falling Price with Falling OI – Indicates Long Unwinding (Bearish Sign)

When both price and OI are decreasing, it shows that traders who were holding long positions are exiting the market. Buyers are losing interest, which puts further downward pressure on the price.

Example: Infosys Futures falls from ₹1,600 to ₹1,550 while OI declines. This indicates long unwinding and a weakening sentiment.

The Importance of Open Interest

Open Interest (OI) is a vital aspect of derivatives trading as it shows the underlying strength behind a price move. While price tells you the direction in the market, open interest tells you whether or not that move has a strong participation behind it. 

• Market Sentiment:

An increase in OI, along with a price increase, indicates new buying, which implies that traders have confidence in bullishness. A price decrease accompanied by an increase in OI gives strong bearish implications. 

• Liquidity Check:

A greater OI means more traders are active in that contract, which gives you better liquidity and facilitates entering and exiting trades easily.

• Trend Confirmation:

Price on its own can be misleading; however, if OI is moving with price, then it solidifies whether the trend is real or just a temporary move.

• Future Market Signals:

Changes in OI will often give early clues about possible reversals, short covering, or profit booking, which allows traders to make better-informed decisions.

Example of Open Interest

The meaning of OI in the share market is the number of open contracts (options or futures) outstanding in the market. To put it simply, open interest options allow traders to know the level of participation and activity in a given stock or index.

A drop in the open interest would imply that traders are shutting down and quitting the market.

Example 1: (For Beginners)

Suppose you have just entered options trading. You purchase one call option contract on Monday with Company XYZ. Your open interest is 1 higher now, as you have just opened a new position. On Tuesday, your friend also purchased 1 contract - since there is 2 open interest.

 On Wednesday, you sell your contract to close it (not to a person opening a new position, but closing out). Now, open interest becomes equal to 1. It is just a matter of counting those still in active positions.

Example for Active Traders

Suppose you are exercising Nifty 50 options. You see that the 18,000 strike call has an open interest of 50,000 contracts, whereas the 18,500 strike has only 5,000. 

It informs you that the majority of traders are putting money on the 18,000 level. Large open interest at a strike price can be some sort of magnet - the market will tend to move towards those levels as that is where the big money is. 

This information will help you to plan your entry and exit points.

Example for Risk Management

There comes a time when you have an overnight hold. You look at the open interest and find it was increasing over all three days, although the price is moving your way. 

This is a red flag! Falling open interest with price shift implies that the trend could be of low quality, as the number of traders involved is lower. It is a party, and people are walking away - perhaps you walk away too before the water runs dry.

How to Use Open Interest for Intraday Trading

Open Interest (OI) assists intraday traders in understanding whether new buying or selling is occurring in the market. OI, together with the price movements, helps traders to know the market strength and invest accordingly in going long, short, or remaining safe.

Pre-Market Open Interest Accumulation

Begin the day by examining what the highest open interest in calls and puts in the strike prices is. These levels become magnets in the daytime.

Example: You are in the Nifty options, and it is 9:20 AM. You see that the 19,500 Call has OI of 80 lakh contracts, and that the 19,500 Put also has OI of 75 lakh contracts. 

This 19,500 becomes your point of pivot point of the day. The market will either tend towards or respond intensely at this level.

Discover Support and Resistance Levels.

Maximum Put OI = Strong Support, Maximum Call OI = Strong Resistance.

Intraday Strategy:

When the market is trading at a price lower than the max Call OI level, that is your resistance, then you can think of shorting at that level.

When the market is trading above the max Put OI level, then that level is your support level - buy near the level.

Example: Bank Nifty is at 45,200.

You see:

45,500 Call OI: 1.2 crore (highest)

45,000 Put OI: 1.5 crore (highest)

Your day plan: Buy/sell between 45,000 (support) and 45,500 (resistance). Buy near 45,000, sell near 45,500.

Quick Decision PCR (Put-Call Ratio).

Formula: PCR = (Total put OI / total call OI)

Intraday Rules:

PCR of more than 1.3-1.5 = Bullish (excessive puts, the market can increase)

PCR of less than 0.7-0.8 = Bearish (excessive calls, market can go down)

0.8-1.2 = PCR neutral (trade range-bound)

As an example, at 2:00 PM, you compute PCR = 1.45. This is high! Too many traders are purchasing puts (anticipating a fall). In options, the market is very likely to do something contrary to all market expectations. You make a contrarian long.

Spot Major OI Changes at Major Strikes.

When a given strike price experiences a huge OI spike (30-50 percent within an hour), large participants are taking a position.

Scenario: You see that at 12:15 PM, the Call OI came out by 19,600 in just 45 minutes to 25 lakh to 55 lakh, but Nifty stands at 19,520. This is a bet of 19,600. You might:

Buy along this trend (go long ). Aim to reach set 19,600, should you be long already.

Understanding volume and open interest

As you begin your journey to learn to trade in the markets, whether that is stocks, stocks, futures, or any combination thereof, you will frequently hear the terms volume and open interest. 

Volume is similar to open interest as both terms reflect activity in the market, and even though they sound similar, the two terms mean different things, as well as tell different stories about the market based on the figure being reflected. 

Understanding volume and open interest will improve your trading decision-making.

What is Volume?

Trading volume refers to the amount of trading activity in a market in a given period, usually in a day.

For example, if a firm buys or sells 1,000 contracts today, the volume is 1,000. Each trade either buying or selling, whether it occurred to open a position or to close a position counts towards volume in the market.

The volume tells you how much activity, or "traffic," occurred that day. In an easy framework, high volume suggests a lot of activity from buyers and sellers, typically good liquidity (easy trading), and expressive price action. 

Conversely, low volume suggests low interest in fighting that day, which may mean price action moves more slowly or becomes more disjointed.

What is Open Interest

Open interest shows how many contracts are currently active and open, meaning they have been bought or sold but not yet closed out or settled. It is a total count of all open positions at the end of the trading day.

Think of open interest as the number of ongoing bets in the market. If open interest is high, many traders still hold positions, indicating strong market interest. If it drops, it means traders are closing their contracts and leaving the market.

Difference Between Open Interest and Trading Volume

Essentially, open interest and trading volume are used to determine the value of trading, whether it is closed or cancelled. We do have limited discussion on some of the parameters, to at the same time be useful to us, so we should have some discussion, even just limited.

Conclusion

Open Interest represents a market pulse, the number of live contracts still in play, and assists you in knowing whether an upward or downward trend is on the move or not.

By seeing the open interest change as well as the price movements, you will be able to make better trading choices and predict the market behavior more accurately. 

You can be a novice trying your hand at the world of options and futures, or you can be an experienced trader honing your strategies, but you must understand open interest to be able to read the market clearly.

At Dhanarthi, we ensure you can easily follow, study, and trade on open interest data to enable you to trade in an intelligent manner and outperform the market.

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