NIFTY FUTURE-NIFTY CALLS NIFTY TECHNICAL ANALYSIS

Nifty Future >> Nifty Future Open Interest

Interest is the total number of options and/or Nifty Future contracts that are not closed or delivered on a particular day.

Open interest is NOT the same thing as volume of options and Nifty Future trades.

Time Trading Activity Open Interest
Jan 1 A buys 1 option and B sells 1 option contract 1
Jan 2 C buys 5 options and D sells 5 options contracts 6
     
Time Trading Activity Open Interest
Jan 3 A sells 1 option and D buys 1 option contract 5
Jan 4 E buys 5 options from C who sells 5 options contracts 5
     


  • On Jan 1, A buys an option, which leaves an open interest and also creates a trading volume of 1.
  • On Jan 2, C and D create a trading volume of 5 and there are also 5 more options left open.
  • On Jan 3, A takes an offsetting position and therefore, open interest is reduced by 1 and the trading volume is also 1.
  • On Jan 4, E simply replaces C and therefore, open interest does not change and the trading volume increases by 5.

Open interest, the total number of open contracts on a security, applies primarily to the Nifty Future market.
It is often used to confirm trends and trend reversals for Nifty Future and options contracts.

What Does Open Interest Tell Us

A contract has both, a buyer and a seller. As a result, these two market players combine to make one contract. The open interest position that is reported each day represents the increase or decrease in the number of contracts for that day, and it is shown as a positive or negative number. A consequent 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 price while the open interest remains flat or declines may indicate a possible trend reversal.

Rules of Open Interest

  • If prices are rising and the open interest is increasing at a rate faster than its average, it is a bullish sign.
    This indicates that more participants are entering the market, involving additional buying, and any purchase is generally aggressive in nature.
  • If the open-interest numbers flatten, following a rising trend in both, price and open interest, take this as a warning sign of an impending top.
  • High open interest at market tops is a bearish signal if the price drop is sudden, since this will force many 'weak' longs to liquidate.
    Occasionally, such conditions set off a self-feeding downward spiral.
  • An unusually high or record open interest in a bull market is a danger signal.
    When a rising trend of open interest begins to reverse, expect a bear trend to get underway.
  • A breakout from a trading range will be much stronger if open interest rises during the consolidation.
    This is because many traders will be caught on the wrong side of the market when the breakout finally takes place.
    When the price moves out of the trading range, these traders are forced to abandon their positions.
    It is possible to take this rule one step further and say that greater the rise in the open interest during the consolidation, greater is the potential for a subsequent move.
  • Rising prices and a decline in the open interest at a rate greater than the seasonal norm is bearish.
    This market condition develops because short covering and not fundamental demand is fueling the rising price trend.
    In these circumstances, money is flowing out of the market.
    Consequently, when the short covering has run its course, prices will decline.
  • If prices are declining and the open interest rises more than the seasonal average, this indicates that new short positions are being opened.
    As long as this process continues, it is a bearish factor.
    However, once the shorts begin to cover, it turns bullish.
  • A decline in both, price and open interest indicates liquidation by discouraged traders with long positions.
    As long as this trend continues, it is a bearish sign. Once open interest stabilizes at a low level, liquidation is over and prices are then in a position to rally again.

If prices are rising and the volume and open interest are both up, the market is decidedly strong. If prices are rising and the volume as well as open interest are both down, the market is weakening. Now, if prices are declining and the volume and open interest are up, the market is weak. However, when prices are declining and the volume and open interest are down, the market is gaining strength.

Volume and Open Interest


Used in conjunction with open interest, volume represents the total number of shares or contracts that have changed hands in a one-day trading session in the commodities or options market.

Greater the amount of trading during a market session, higher is the trading volume.
A new student to technical analysis can easily see that the volume represents a measure of intensity or pressure behind a price trend. Greater the volume, more can we expect the existing trend to continue, rather than the reverse.

Volume precedes price, which means that the loss of either upside price pressure in an uptrend or downside pressure in a downtrend will show up in the volume figures before presenting itself as a reversal in trend on the bar chart.
The rules that are set in stone for both, volume and open interest are combined because of their similarity.
Having said that, there are always exceptions to the rule, and we should look at them.

Price Volume Open Interest Market
Rising Up Up Strong
Rising down down Weak
Declining Up Up Weak
Declining down down Strong

Consequently, the price action increase in an uptrend and open interest on a rise are interpreted as new money coming into the market (reflecting new buyers) and is considered bullish. Now, if the price action rises and open interest is on the decline, short sellers that cover their positions cause the rally. As a result, money leaves the marketplace and the situation is considered bearish.

If prices are in a downtrend and open interest is on the rise, chartists know that new money is entering the market, displaying aggressive new short selling. This scenario will prove out a continuation of a downtrend and a bearish condition. Lastly, if the total open interest is falling off and prices are declining, the price decline is being caused by disgruntled long position holders being forced to liquidate their positions.

Technicians view this scenario as a strong position, because the downtrend will end as all the sellers have sold their positions. The following chart therefore emerges:

Bullish An increasing open interest in a rising market
Bearish A declining open interest in a rising market
Bearish An increasing open interest in a falling market
Bullish A declining open interest in a falling market

DISCLAIMER:
Investments in stock markets are risky.
While you can earn excellent money, you can also lose a lot.
Information and advice is based on technical analysis and is provided without any liability
(financial or otherwise).