Here is a complete and comprehensive guide on how to access line Open Interest data, analyze it and generate profitable swing trades.
Stock Exchanges measure Open Interest (OI) as a number that represents outstanding (open) Futures and Options (FNO) contracts.
Outstanding contracts of any stock or index as measured as follows:
Outstanding Contracts in futures trades
Outstanding Contracts in Call Options at different Strike Rates
Outstanding Contracts in Call Options at different Strike Rates
TOTAL OPEN INTEREST IN THAT STOCK (OR INDEX).
The OI is calculated for one side (Long or Short)
A. Example of How Outstanding Open Interest is Measured
Note that when you take the net position, it is always ZERO because for every buyer there is a seller. But OI is calculated as the number contracts outstanding on either side.
Buyers and sellers keep squaring up their positions before expiry and therefore the open interest keeps on fluctuating (rising or falling) every day.
B. OPEN INTEREST PERMUTATIONS (and their interpretation)
Here’s how you analyze the different permutations:
- OI RISING, PRICE RISING, VOLUME RISING
Buyers are chasing the stock making the price rise. The OI too is building up and the volumes too are increasing.
THIS IS A BULLISH SIGNAL
- OI RISING, PRICE FALLING, VOLUME RISING
Sellers are hammering the stock, making the price fall. The OI is building up and the volumes too are increasing (both indicating an increase in shorts).
THIS IS A BEARISH SIGNAL
- OI FALLING, PRICE NEUTRAL OR FALLING, VOLUMES FALLING
It implies that bulls are squaring up positions leading to a fall in prices. However, volumes too are dropping and therefore the downside can be limited.
THIS IS A SIGNAL TO TRACK THE STOCK because once the selling is done, it can move either way, with a higher chance of it moving up.
- OI FALLING, PRICE RISING, VOLUMES FALLING
It implies that bears are covering shorts leading to a rise in prices. However, volumes too are dropping and therefore the upside can be limited.
THIS IS A SIGNAL TO TRACK THE STOCK because once the short covering is done, it can move either way, with a higher chance of it moving down.
Restrict your trading to these signals, and preferably, stock to 1 and 2.
NOW REMEMBER, Do NOT act on OI Data without checking a special technical setup that I have crafted for you. This will follow after a few sections.
C. Where to Access Live Open Interest Data
MoneyControl is the best source where you can check OI data per sector. Remember to browse stocks in each sector. This link will take you to the auto sector and from there on you can use the drop down.
The second source is the NSE website which does provide helpful information but does not report increases in price and volumes, (which you will have to manually verify). Still it’s a good tool.
D. What Time To Access OI Data
The data gets more and more meaningful as the trading day passes by, and you should ideally start checking data from around 12 PM and check it every 15-30 minutes right till the end of the trading day.
You are looking for:
A decent rise in OI (above say 8%-10%) with rise in volumes and an okay rise in price (you don’t want to chase stocks that have risen like crazy, so look for 2%-4% increase in price).
A decent rise in OI (above say 8%-10%) with rise in volumes and an okay fall in price (you don’t want to short stocks that have fallen like crazy, so look for 2%-4% drop in price).
REMEMBER: You will get no more than 1-3 bullish or bearish stocks everyday. These stocks are good for swing trades (trades that can stretch from 1 day to 4-5 weeks).
E. What to do after identifying the stocks that are eligible for swing trading
Even though the OI data suggests a buy or a sell, you must check what the indicators tell you.
Therefore, set up 3 indicators in your charting software or at Investing.com.
(you can read more about the first two indicators here)
c. Accumulation/Distribution: This is an important indicator because it tells you whether the stock is being accumulated (bought) or distributed (sold).
It has a zero line. When the indicator is below the zero line, it means distribution is taking place, and when it is above the zero line, it implies investors are buying.
Now when when the Accumulation-Distribution line reverses its trend, you must track the stock.
For example, if a stock is lagging and the accumulation-distribution line starts moving up towards or crosses the zero line, it means strong hands are buying the stock irrespective of how the price moves. And vice versa.
This is an extremely important indicator that you must set for any stock that you identify.
So, on Sunday night when I started writing this article, I found that PTC was generating a lot of interest and the OI data looked bullish.
But I did not act. Instead I checked the charts (The 1D candles because the stock was to be bought for a swing trade) and found that:
Here’s what I saw and concluded:
- Candles were red right from the opening.
- SuperTrend signaled a sell when the price was 95.
- The stock was way below its VWAP.
- Though the stock was in an accumulation phase (above zero line), the line was falling.
All these factors made me stay away from the stock. But you should keep on watching the PTC charts for signs of reversal. And if the accumulation line starts getting stronger, you should then check the OI and consider it for a swing trade.
And this is exactly what you should do once you identify stock.
F. Analyzing Open Interest Data
It’s 14-5-18 and around 3.20 PM.
To write a live article I would start watching OI data from 12 PM. However, I have gotten late and at 3.20 PM, here are a couple of stocks that look good for a swing trade:
Canara Bank: 13% increase in OI, 103% increase in volume and 1% increase in price. This should be on your watchlist.
It is is accumulation zone and is the accumulation line is steady. Any spike in price can be a sign of bullishness. I would watch Canara Bank.
Adani Ports: 19.6% increase in OI, 124% increase in volumes and 1.21% fall in price. Given Adani’s political connections and the sword of elections dangling over India, it does seem that the stock will now be volatile.
Though positive, the accumulation distribution line has started falling. I would watch this stock and if the accumulation-distribution line starts dropping, Adani Ports could be a shorting candidate.
So, well, this is how you interpret OI data, apply technicals to your picks and then act. Of course, I did an EOD study today, but would urge you folks to start checking OI data from 12 PM onwards to figure out a couple of profitable swing trades. Good luck.