How to Use Open Interest for Intraday Trading or Trading?

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 Open Interest (OI) is one of the very useful indicators in future and options (F&O) to trend in a particular stock or broader market index trading in the derivatives market. You can use the open interest (OI) data to find out the sentiments of the traders towards a particular stock or indices. You can also analyze the current trend and expected price movement.

For intraday trading or for short-term trading in the F&O segment with the short-term weekly or monthly you can use the open interest to get insight of the stocks trading under this segment. And to use the OI effectively in trading you need to properly read, understand and interpret the open interest (OI) data with examples. That we are going to discuss here.

What is Open Interest in the Stock Market?

Open Interest or OI is the total number of contracts in options and futures or derivatives market held by the traders that are active right now. These positions are still open in the market and not closed, which means neither expired nor exercised within the time frame.

Open interest keeps changing on a daily basis with the fresh position created pushing the OI up, while when existing positions are closed or exercised the OI decreases. When OI increases, traders create a long position in the stock or in the underlying security or main index like Nifty. When OI decreases, it means, traders create a short position in the stock or underlying security.

How to Interpret Open Interest?

When you understand the relationship between the volume of trade and the change in price of the underlying security or index you can interpret the open interest. And there are various situations when OI changes with the price change that are listed below.

Situation 1

When open interest increases and the price of the underlying security or market index also increases, it means the market is bullish or the price of the underlying security will go up.

Situation 2

When open interest decreases and the price of the underlying security increases, it indicates the market is bullish but there is a chance of trend reversal and the market will turn bearish.

Situation 3

In this situation, when OI increases but the price of the market index decreases, it indicates the market is bearish and there could be panic selling in the market or underlying security.

Situation 4
In this combination of OI and price change, when the OI decreases and the price of the underlying security or the broader market index also decreases, then it is considered that the sentiment of the market is bearish.

How to Use Open Interest for Trading?

You can use the OI for trading with the combination of price change with the change in OI to find out the current trend in the underlying security. And based on the trend and expected movement you can create the long position or short-selling with the right trading strategy.

In the future & options market, you have both choices, either to buy or sell the contracts for a specific expiry month depending on your expectations and trading style. If you want to use the OI for intraday trading also apply the technical indicator on the price chart to get the confirmation of trend and right levels of buying or selling in the underlying security.

While in future & options trading you have multiple options strategies you can apply depending on the market conditions. From bullish option strategy to bearish option strategy and sideways options strategies, all can be applied with the help of analysing the OI data.

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