What is Open interest OI???
OPEN INTEREST is a word which is used in Future &option and commodity. Open Interest is the total number of outstanding contracts that are held by market participants at the end of the day. It can also be defined as the total number of futures contracts or option contracts that have not yet been exercised (squared off), expired, or fulfilled by delivery. It's also one of indicator used for determine the strength, weakness and next direction of particular index or stock.Open interest measures the flow of money into the futures market. For each seller of a futures contract there must be a buyer of that contract. Thus a seller and a buyer combine to create only one contract. If a new buyer, looking to buy a particular contract which will go up in future. At the same time, seller of that particular contract may thought, that contract will not go up in future.
Suppose both buyer & seller close their position then OI one point will decrease. The third and final possibility is one old trader passing off his
position to a new trader ( one old buyer sells to one new buyer). In
this case the open interest will not change.
New buyer - New seller = Open interest will increase
Old buyer - Old seller =Open interest will decrease
New buyer - Old buyer = Open interest will not change
New seller - Old seller = Open interest will not change
How to use Open interest???
By monitoring the changes in the open interest figures at the end of
each trading day, some conclusions about the day’s activity can be
drawn. Also if particular future contract's open interest increase with increase in price movement then we can desire that particular contract will go up further and money flow also increasing in it. So we may also enter in it. Suppose if this process is reverse that is particular future contract open interest increase with decrease in price movement then we can desire new sellers increased in that counter. So we can also go short in that contract.
Increasing open interest means that new money is flowing into the marketplace. The result will be that the present trend ( up, down or sideways) will continue. Declining open interest means that the market is liquidating and implies that the prevailing price trend is coming to an end. If open interest is not changed but price movements will get more volatile means, lot of persons are closing their positions in that contract & Trend reversal of that contract starts soon.So we have to close our position is good idea.
Price
|
Open Interest
|
Desiring factor
|
|
Rising
|
Rising
|
Market is Strong
|
|
Rising
|
Falling
|
Market is Weakening
|
|
Falling
|
Rising
|
Market is Weak
|
|
Falling
|
Falling or flat
|
Market is Strengthening or
trend reversal
|
An increase in open interest along with an increase in price is said to
confirm
THANKS & REGARDS
NSEBSENOW
