Open ZERO Brokerage FREE Share Trading Account - Buy and Sell Stocks Without Brokerage - Set Good Till Cancelled (GTT) on System and ForgetTraditional brokers charge a lot for brokerage; however, this broker does not charge anything for stock buying and selling. Also, you can set a Good Till Cancelled (GTT) order after buying stock so that the system can sell the stock automatically at your desired price even if you are not monitoring the market. Only 25k is blocked for option selling with hedge. It takes 5 minutes to open an account online. I will help you to learn options hedged trading if your account is opened today. Click here and Open Free Account with Them Today >>
This article is on Open Interest in Option trading and will help you to know what may happen to Options with regards to Open Interest.
In short the total number of outstanding option contracts in the exchange market on a particular day is open interest in options.
Let us simplify this.
As we have read for a trade to happen there has to be a seller and a buyer of option otherwise a trade cannot happen.
Now let us suppose At The Money call option is 8700 CE and a lot of traders are looking to trade that.
Lets also assume that India VIX (Option Volatility Measure Index which has a lot impact on option pricing) has gone high and there is no such news that may move the markets to any direction.
Since India VIX has gone high most experienced traders will try to sell this option.
And if you see today’s market Nifty is up by 70 points. So a lot of traders will think it is a great buy option. Mostly the new traders who have no experience.
Due to this a lot of trading will happen in the 8700 CE option and also there is a possibility of a lot of trading happening in 8700 PE option.
In fact this is the main reason why mostly the open interest is higher in At The Money Options.
Just to let you know that in my course I do not teach to trade on At The Money option as they are the most dangerous option to trade even for an experienced or for a new trader.
Only time value is there in At The Money (ATM) options so I tell a different strike to trade in my course. Those who have done are pretty happy with the course, the reason you know now why.
How The Open Interest is Counted?
Obviously this cannot be done by humans so there are software working in the background in NSE and BSE to count the open interest.
Let us take one example.
One seller wants to sell January 2017 8900 CE. There is no buyer there.
Open Interest 0. Trade is open.
Suddenly one buyer sees it and thinks it’s too cheap and buys it.
Open Interest account opens for January 2017 8900 CE. It is 1.
Another seller comes and trade happens.
Open Interest for January 2017 8900 CE is now 2.
Let say over the next three days 200 people have done the trade and so the Open Interest is now 202.
Let say on the fourth day three people closed their trade.
Open Interest on January 2017 8900 CE is now 202-3 = 199.
Hope now it is clear. All open trades on a strike are only counted. The trades that gets closed are taken out. The new trade that happens are added. This is how open interest are calculated by the software working with the BSE, NSE or MCX – the trading houses.
Can We Benefit From Open Interest?
You will see that in Television Business channels a lot of experts keep saying Open Interest has increased in that Call or that Put so it looks like markets resistance is there or support is there with reference to the strike prices where open interest are the most.
Next day they change their view according to the open interest.
So if you ask me I do not care. One day it will be right next day it will be wrong.
Like this one day you make money next day you lose and it will keep happening. So I do not care.
I am a conservative trader happy with small and consistent profits and least bothered about the direction of the markets. That’s the reason my course paid subscribers keep making money. 🙂
Those who think too much about Open Interest, support and resistance keep making and losing money. Those who done care about it and properly hedge their trades keep making money over time.
So do not look at Open Interest and trade these strikes because half of them are sellers and half buyers, so nothing can be concluded for sure.
Where to Know the Highest Open Interest?
In the NSE site here is the link:
Here is a screen shot as of 18-Oct-2016 at 12.23 pm. Please note that it can change anytime – that is the reason I have written date and precise time.
You can also see increase in open interest here:
Decrease in Open Interest here:
Highest Open Interest here:
Lowest Open Interest here:
In the next class we will learn more important advanced terms on options trading like difference between Ask, Bid, LTP, Best Sell, Best Buy and about the stock exchanges.
Click to Share this website with your friends on WhatsApp
COPYRIGHT INFRINGEMENT: Any act of copying, reproducing or distributing any content in the site or newsletters, whether wholly or in part, for any purpose without my permission is strictly prohibited and shall be deemed to be copyright infringement.
INCOME DISCLAIMER: Any references in this site of income made by the traders are given to me by them either through Email or WhatsApp as a Thank You message. However, every trade depends on the trader and his level of risk-taking capability, knowledge and experience. Moreover, stock market investments and trading are subject to market risks. Therefore there is no guarantee that everyone will achieve the same or similar results. My aim is to make you a better & disciplined trader with the stock trading and investing education and strategies you get from this website.
DISCLAIMER: I am NOT an Investment Adviser (IA). I am an Authorized Person (AP) of a Stock Broker. I do not give tips or advisory services by SMS, Email, WhatsApp or any other forms of social media. I strictly adhere to the laws of my country. I only offer education for free on finance, risk management & investments in stock markets through the articles on this website. You must consult an authorized Investment Adviser (IA) or do thorough research before investing in any stock or derivative using any strategy given on this website. I am not responsible for any investment decision you take after reading an article on this website. Click here to read the disclaimer in full.