What is open interest OI and volume? How do they help in measuring liquidity?

Opposite of right to buy is the right to sell and this is called a put option. In this case, the buyer of the option will pay a premium to seller of the option to get a right to sell. If prices of distant delivery futures contract are higher than near delivery futures contract, it results in positive calendar spread and such a situation is called contango market. For example in the above example if the price of August futures is higher than the price of July futures, it is called contango.

  • For instance, if both sides to the transaction (i.e. long and short) are new or old, open interest will change.
  • As a reliable indicator of fluctuations and shifts in the markets, the put call ratio tells you about market direction in the future, although in a contrarian way.
  • In this example strike price of the call option is Rs 1.1 crore and maturity period is 6 months.
  • But it is highly recommended to read the OI change along with other parameters like volume and price to get better analysis.
  • The open interest analysis helps a trader to understand the market scenario by only showing a number of futures contracts that have been changed hand during the market hours.
  • Performing Option Chain analysis on instruments that are illiquid will often give incorrect information and will be prone for errors.

Also, the clear idea of the two gives traders an idea of the price they are paying to buy an option contract. Open interest vs volume is important for active options traders as it helps in determining the liquidity and market sentiments. Inversely, open interest decreases when positions in the existing contracts are closed out by buyers and sellers .

The open interest data is of two types, one for the day and another for the total period or duration the contract. Now let us understand what else do the figures for volume and open interest signify. Daily trading volume refers to the number of options contracts traded in a single day. This volume is a strong marker of the strength and performance of the underlying securities. It also gives insight into the relevance of the stocks of a company and investors’ preferences. Volume in context with trading is defined as a trade measure within a specific period for a specific type of security.

Open Interest as the word suggests is the amount of interest on any derivatives instrument. Indian equity derivatives market has two kinds of instruments – Futures and Options. PCR OI is calculated by dividing total number of puts open interest by the total number of calls Open Interest on a particular day. Since there are no new contracts created, the OI remains the same. Let us understand ‘what is open interest’ with a market demonstration. Open interest that confirms the price action is supportive of the move in the price and indicates that the current trend is healthy and is likely to continue.

How to Interpret Volume and Price Together

Noor is selling the house so that the proceeds can be utilized to set up a catering business. She is also keen to seal the deal with Sita, but needs some time to find a suitable rented accommodation. Thus it made sense for both of them to enter into a futures contract executable after 6 months. Everyone knows that traders in options markets, especially those who buy options, are not known for their success rates.

As a result, open interest in options trading does not always imply a bullish or negative outlook. One can also use the concept of open interest in futures trading. Let’s suppose Noor is keen to sell the apartment right away and move out.

difference between open interest and volume

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These factors are instrumental in interpreting the market trends of options trading. This article will delve into open interest meaning, trading volume, its implications, what is OI in options, and what is open interest in share market. Since open interest and trading volume are most often used in futures and options trading, let us first review how these operate. Futures and options are forms of legally binding agreements, or contracts.

New investors must first learn the basics of futures trading before foraying into the same. Margin is the amount that a trader has to pay the broker to trade in futures. In a futures market, every contract that is sold will have a buyer. Therefore, the total number of contracts transacted within a day is balanced. In case there is an ongoing trend in the market with a sudden drop in open interest of futures, investors should not necessarily believe the trend, since there can be chances of trend reversal.

As a rule of thumb, if the spot price of the stock and OI of futures both move up, it indicates a bullish signal and prices might continue to rise. A decrease in price with an increase in OI or conversely difference between open interest and volume an increase in price with a fall in OI both indicates bearish signal. A decrease in price with an increase in OI or conversely an increase in price with a fall in OI both indicates a bearish signal.

A positive change in put OI indicates that more people have bought put contracts compared to previous day. This indicates that market participants expect the price of the stock to fall and are buying put options to protect the downside to the stock. On the contrary if the output is negative it indicates that investors have squared off their open put positions and are not fearful about the price fall. In the example of Mumbai housing market the contract was valid for a period of 6 months. However in case of futures contracts traded on national stock exchange, the contracts are available in 1 month, 2 month and 3 month time frame. The time frame up to which the contract lasts is called ‘The expiry’ of the contract.

So far, we have talked about Option Chain analysis pertaining to Nifty and Bank Nifty. However, Option Chain analysis can also be applied to stocks, especially the top stocks that are a constituent of the Nifty index. Let us take the example of Reliance Industries Ltd, which is India’s largest company by market capitalization. 31, 2020 and other guidelines issued from time to time in this regard. In case of non allotment the funds will remain in your bank account. Trade Brains is a Stock market analytics and education service platform in India with a mission to simplify stock market investing.

Reading and Analysing an Options Chain

Open Interest increases when new contracts are created or opened. The increased number of open interests would mean that there are more buyers and sellers for a particular security. Liquidity refers to the ease and speed with which a future or option can be bought or sold (i.e. convert into cash) without affecting it’s price. In F&O markets, contracts that are liquid are more likely to trade at the fair market price seamlessly. Open interest is one variable that many futures traders use in their analysis of the markets used in conjunction with other analysis to support trade decisions.

Analysts and traders commonly track open interest to observe unusual buildup of positions in a contract.However, open interest positions should be cross-checked with other parameters such as price. But, if A unwinds his position of 10 futures, then open interest will decrease by 10, because these contracts cease to exist. Instead, if A sells these to another trader C, then the open interest remains unchanged since it is C who holds the contracts now. No need to issue cheques by investors while subscribing to IPO. Open Interest does not relay the information if the options were bought or sold but provides valuable information regarding options trading. To comprehend ‘what is OI in option chain,’ we must look at the benefits of using it.

difference between open interest and volume

High open interest indicates at ample liquidity, and vice versa. Again, one should preferably open position only in those option contracts that have good open interest. Open interest is also defined as the number of Options contracts still open and held by traders and investors.

Trading Psychology

For example, if on a certain day, 3 traders are holding 10 lots of contracts, then the open interest for that day would be 30. Entry and exit into the high-volume shares are comparatively easy than the entry and exit into the low-volume shares in the market. Therefore, high-volume claims offer higher liquidity, and low-volume shares offer liquidity levels. Open interest serves as a measure of the trading for the asset and shows whether capital into option and future market is increasing or not. The advantage of open interest is, it reflects higher liquidity for the contract served.

difference between open interest and volume

The difference between the last available bid price and the asked quote price for a contract is known as the bid-ask spread. The idea is that traders are supporting the trend by entering the market that increases the open interest. As traders lose faith in the trend they exit the market and open interest declines. Open interest and volume are related concepts, one key difference is that volume counts all contracts that have been traded, while open interest is a total of contracts that remain open in the market.

Explained simply, a put, or a put option gives an investor a right to sell any asset at a fixed price, determined in advance. A call, or a call option, gives an investor the right to purchase any asset at a price that is predetermined. In both cases, there is no obligation on the investors part to carry out either of the activities on a predetermined date. In case traders purchase more puts relative to calls, the sentiment of the market is bearish, overall. If traders and investors are purchasing more calls than puts, the implied mood of the markets is bullish going ahead. Significantly, the put call ratio, Nifty-centric, gives investors a fairly decent picture of market trends.

Understanding PCR (Vol) and PCR (OI) with Illustrations

Here, the open interest has mostly decreased and so have the Call premiums. This is a sign that traders who had built long positions could be liquidating their longs, either to book profits or to cover losses.Now notice the boxes in black. Here, the open interest has mostly decreased while the Put premiums have increased. This is a sign that those who had built short positions could be covering their shorts, possibly to book profits or cover losses. At these strikes, the open interest has mostly increased and so have the Put premiums. This is a sign that fresh long positions are being built in Put options, which has bearish implications.

Difference between Open Interest (OI) and Volumes

Let us say the trader buys 10 lots of future contracts in the morning at $10.60, and during the day the stock rises to $10.90. He sells 5 lots of future contracts and carries forward the 5 lots of contracts for the next day in anticipation of more price rise. Now here the volume data will show that 15 contracts or 750 shares were traded, but the open interest data will be 5 contracts or 250 shares only.

A positive change in call OI indicates that more people have bought call contracts compared to 5 days ago. On the contrary if the output is negative it indicates that investors have squared off their open positions and are not confident about the future price rise. It is an important and useful indicator to understand the market as 80% volumes of the NSE F&O segment is contributed by Option trading. Let us assume that the PCR has gone up sharply in the last few days and the market index has also corrected by 15% during the last 1 month. Contrarians believe that there is too much pessimism as small and retail investors are just buying too much of puts to hedge their downside risk.

Cynthia also goes long and buys six contracts, thereby increasing open interest to seven. If Kurt decides to short the market and sells https://1investing.in/ three contracts, open interest again increases to 10. Most of us have traded in these futures but let us just refresh our memories.