Low Open Interest Option

Life is full of ups and downs and so is the stock market. You may see high open interest at times, but it also comes with a low open interest option at times. So, are you also confused about what it means and how to deal with it? 

Don’t worry because we will discuss it in the article below. 

Now you tell whenever there is the opening of a new restaurant in the city what do you usually see?

Ofcourse the huge crowd of people at least for the first few days? This crowd or number of people can be compared with the Open interest in Options. 

The decrease in the number of people depicts the low interest which eventually affects the sale and overall business.

Similarly, the low open interest option say a lot about the value of the options contract. 

Want to know more about the low open interest value in options?

Dive in to grab the idea of every single aspect of the value.

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What is Open Interest in Option

Open interest is the number of open contracts in the market. Whenever a new buyer and seller enter a contract, they are opening one new position in the market. 

So, every time a new buyer or seller enters the market, there is a new position that is created, and the open interest increases by one.

Open interest tells you the interest of the traders in a particular contract. This does not tell you how strong or weak the trend looks like but when combined with the underlying price and volume, it can give good trading signals. 

The open interest changes during the course of the period and can affect the trading decisions. So, let us first understand the changes. 

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Change in Open Interest In Options 

As discussed, open interest is actually the number of unsettled contracts in the market.

Now every day either the options contract is being exercised or the new option contract is being traded.

This keeps on changing its value and hence it becomes more important for traders to learn how is open interest calculated and how this change makes it easy for the trader to understand the market sentiments. 

Coming back to change, when new options contact entered the market, the OI value increases by one. Similarly exercising the contract decreases its value.

In case the option position is being transferred, what do you think the value of OI would be?

Well! in that case, the value of open interest remains unchanged.

In this article, we are majorly focusing on the decreasing or low open interest option value.

Till yet! what do you think would be the low Open Interest option means.

It’s clear, low value means the low interest of traders in a particular asset at a specific strike price.

Let’s dig deeper to grab more understanding of how to analyze the low OI and what other parameters to be considered to get better results.

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Low Open Interest Option Means

As in intraday trading, depending upon one indicator is not useful and can generate the wrong signal, so does the Open interest in options.

Open interest analysis cannot be done solely on the basis of open interest. It is only with volume and price that you can make good trading decisions. 

So, if there is a low open interest option value then it is good to check it with other parameters like volume and price to do better analysis as discussed below: 

• When the open interest is low, and the prices are increasing, it is a strong bearish signal. This means that the money is exiting the market as people are losing their interest in the particular option contract. 
• When the prices are decreasing and the open interest is also decreasing, it shows a bearish trend. Although, some people also consider it as a weak bullish trend because after the selling is over, the market can be bullish again. 

 

• If we study it in terms of volume, then when the volume and open interest both are decreasing, it is a bearish signal. 

 

What do you understand from the above analysis?

It’s simple, that buying a call or put option with low open interest there is a high possibility that you would suffer a loss in the trade. 

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Conclusion 

Here, we can conclude that low open interest option when combined with price and volume usually denote a bearish trend in the market. This means that the interest of the traders is decreasing this decreases the Open interest. 

Further, the low OI accompanied by the decreasing price or volume generates a strong signal of a bearish trend.

You can analyze the open interest and then take a good trading decision. We hope that this piece of information will help you make significant profits!

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