Open Interest is believed as a Confirming Indicator by numerous traders across the globe. It generally confirms the market trend (whether its rising, falling or sideways) when used in conjunction with other parameters like volume and price. It also measures the flow of money in the market. This article would introduce you to the concept of Open Interest, and also demonstrate Open Interest Analysis Excel for Option contracts. The Excel sheet is downloadable from the end of this article.
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Introduction to Open Interest
Open Interest represents the number of outstanding contracts for Future and Option contracts. For Options, every strike price of Option contract has an individual Open Interest value. It can also be defined as the total number of Future or Option contracts that has not been squared off. Open Interest tends to zero value at the expiry day of derivatives market as every one squares off their open positions.
Check out the below image which shows Open Interest of Nifty Futures:
Let’s consider a hypothetical situation to understand the concept of Open Interest in a better way:
Day 1: Ayesha buys one lot of Nifty 8300 CE, while Pooja sells one lot of Nifty 8300 CE. Total Open Interest: 1
Day 2: Deepika buys two lots of Nifty 8300 CE, and Heena sells two lots of Nifty 8300 CE. Total Open Interest:3
Day 3: Ayesha squares off her entire position (1 lot), and Heena buys one lot. Thus, effectively one Lot of Nifty CE gets offloaded from the market. Total Open Interest:2
Day 4: Pooja and Heena buy one lot of Nifty 8300 CE, and Deepika sells her two lots. Total Open Interest:0
To summarize, if both parties to the trade are initiating a new position ( one new buyer and one new seller), open interest will increase by one contract. If both traders are closing an existing or old position ( one old buyer and one old seller) open interest will decline by one contract. 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.
Relationship between Open Interest,Price and Volume
There is a very tight co-relation between Open Interest, Price and Volume. It helps to interpret the trend of Market very effectively. An increase in open interest along with an increase in price is said to confirm an upward trend. Similarly, an increase in open interest along with a decrease in price confirms a downward trend. An increase or decrease in prices while open interest remains flat or declining may indicate a possible trend reversal. Te relationship between Open Interest, Price and Volume can be summarized in the following table:
|Price||Volume||Open Interest||Market Trend|
Open Interest Analysis Excel Sheet
This Excel sheet is designed to predict the Trend of each Option Strike of Nifty Futures. Please note that this is not our creation, as it is freely available in many online forums. We have just tried to make it more presentable so that even beginners can understand it. The Excel sheet attached with this post is for Nifty Options. It can be modified very easily for any other contract too.
The Trend determination is based on Option Price change and change in Open Interest with respect to previous day. Below is the summary of calculations present in Excel Sheet:
|Price Change||Change in Open Interest||Signal|
See the below screenshot:
How to use this Excel Sheet
Step 1: Download the Excel sheet from the link provided at the end of this post.
Step 2: Double click and open the downloaded file. It will throw some warnings for the first time. Click on OK.
Step 3: Make sure you are connected to Internet. The Excel sheet will update every 5 minutes.
Please download Open Interest Analysis Excel from the below link. Let us know in comments section if you have any queries.