High Open Interest

Do you also get excited seeing the high open interest every time but couldn’t figure out what to do with it exactly? Then don’t worry as all the possible solutions lie here. 

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It was the month of November 2020, and there was a weird excitement amongst the people of Chandigarh, especially the youth. 

But what was the reason? 

The reason was Abhishek Upmanyu! The eye candy of today’s generation announced his tour to Chandigarh, and everybody was just waiting to get their funny bones tickled. 

Without a doubt, there was a lot of chaos for the tickets, so the organizers decided to sell some early bird tickets and then determine the price accordingly.  The early bird tickets got sold at a rapid pace. 

Happy with the response and seeing the increasing interest and demand, the prices were decided to start at ₹2000/ticket. The high prices also gave the buyers a signal that there are more people who are wanting to buy the tickets. 

This is exactly what a high open interest also indicates. It shows the increasing interest of the traders. 

Before diving into what is high open interest, let us quickly go through what an open interest means.

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Open Interest in Options 

As we were talking about Abhishek Upmanyu’s show previously, the number of tickets that were available in the beginning represents the open interest. This means that the positions which were opened to be filled. 

Slowly, when the seats started filling, the vacant ones decreased in number. This is what an open interest in options means. 

Open interest is the number of outstanding contracts in the market. Every time a new buyer or seller enters the market, there is a change in the open interest in options.  

The high and low open interest option says a lot about the current and upcoming trends of the market.  

It is therefore very important to understand the analysis of open interest as well. 

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Open Interest Analysis

Open interest analysis is very important when you are looking to make a decision in the options trading market. 

Just like when you rely on different indicators and charts when you are doing intraday trading, you can look for open interest in options trading. 

When you analyze an open interest, it is important for you to know how is open interest calculated. So, let us have a quick look!

• If any new buyer or seller enters the market, the open interest increases by one because there are new positions being created in the market. 
• If the contract gets executed in the market, the open interest decreases by one. 
• If one person transfers his position to someone else, the open interest remains unaffected. This is one of the differences between open interest vs volume, that volume increases with every trade but the open interest does not.  

The open interest can fluctuate between various ranges and can be high or low accordingly. If the open interest is comparatively high on some security, what does it indicate? 

Let us solve this question in the upcoming sections. 

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High Open Interest Options

What is high open interest and what does it signify? Let us first look at the reason why open interest increases. 

When there are various buyers and sellers entering the market, the open interest increases. This means that more and more open positions are being created in the market. 

High OI  more often signifies that either the bullish or bearish trend (depending on the price) is strong and is going to continue for some time. It is like a confidence meter for traders. 

When only the open interest is looked at, it does not give clear indications. It is only when it is combined with price and volume, that it can give signals. 

Let us see how you can make the best use of high OI.

Now when you look at the options with high open interest, what will you do? As discussed earlier, open interest alone cannot determine the trend. It has to be seen with the underlying price or volume.  

High OI means that the interest in that particular security is increasing. This in no way means that it is a bullish trend. 

If we look at the open interest in addition to the underlying price, it can give rise to different signals. Let us discuss them.

• If you see high open interest high prices, this means that there is a strong bullish trend in the market. Because this usually indicates that new money has started flowing through the market, as the demand and interest both are increasing. 
• If the open interest is increasing but the price of the asset is decreasing, it signifies a strong bearish trend.
• If the open interest is neutral and the prices are moving either upwards or downwards, it indicates that the current trend is weakening and there can be a trend reversal soon.  

You can also look at stock volume to determine the trends in the options market. 

• If the open interest is high and the volume is also high, it gives a strong bullish signal. 

So, when we talk about what high OI in a call option means, it signifies that there is significantly more buying happening and there is a possibility that you might get the option contract at a good price. 

 The question now is, is high open interest good? 

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Is High Open Interest Good or Bad? 

What does high open interest signal you to do? High open interest can signal that there is more interest in the particular contract. It further helps a person in determining that there is comparatively higher liquidity in the stock. 

It also lets the trader know that there is a strong trend in the market and the momentum will be continued for a significant time. 

High open interest is good when analyzed with the price can give a strong indication. It is an indicator that there is money coming into the market. 

So, it can be really helpful for you to have a look at the open interest and thus make good decisions. 

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Conclusion 

Open interest can actually ease your process of options trading. You can easily look at the prices and volume and then make a decision of how you can make the best out of the high value of open interest. 

We hope that you now know what to do when you see an increased OI in the market and will now be able to make good profits. Enjoy your trading journey!

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