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How To Interpret Open Interest Data

how to interpret open interest data
How To Interpret Open Interest Data
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It seems like market will be extremely volatile starting now (Feb 2018) and therefore now is the time to understand how Open Interest (OI) data can be interpreted.

Understanding such data can help you understand how stocks will trend in the cash market. Know that I am not asking you folks to trade FNO, I am suggesting that you should interpret its data so that you know how stocks will trend in the cash market.

What is Open Interest?

In F & O, Open interest represents  the total number of open contracts (buy + sell) on the index or stock futures.

Open interest is a very important  indicator because most market analysts, including the fundamental analysts, agree that volume action is always followed by price action.

Volume is lightening, price is the sound of thunder.

So, I’m now going to show you how to interpret Open Interest in different market scenarios, from where to get your daily data and then learn which stocks will move in what direction in the near future.

Example

To help you better understand the next section on interpretation, here’s an example:

Castrol — NSE Cash Price — 390

NSE Oct End F & O price — Buy @ 398, sell @ 401

Now, let’s say on Day 1 there are 1,00,000 buyers @ 398 and 1,00,000 sellers @ 401 in F & O. The volume traded is 50,000.

So, Open Interest for Castrol is 2,00,000.

Now, let’s move to Day 2. Let’s say on Day 1 there are 1,20,000 buyers @ 408 and 1,00,000 sellers @ 411 in F & O. The volume traded is 75,000.

What this implies is that:

a. There is 10% increase in OI (2,20,000 vs 2,00,000)
b. There is 50% increase in volume (75,000 vs 50,000)
c. There is 2.5% increase in price (408 vs 398).

This OI data implies a bullish signal.

Here is the link that updates OI data live. remember to browse through each sector. 

Now, having understood how OI signal works, here is how you interpret the data:

How to Interpret Open Interest Data

Security PriceVolume in F&OOpen InterestTrend
UpUpUpBULLISH (new money buying the security)
UpDownDownBEARISH (new money dried up, but bears are short covering which is why prices are up)
DownUpUpBEARISH (new money aggressively shorting the security)
DownDownDownBULLISH (this scenario implies longs are being unwound, and the security will perk up again when the positions are liquidated. You should track such stocks closely and jump in when selling dries up)

If none of the 4 conditions are met, apply this logic:

If market is rising, and open interest is rising, the sign is BULLISH

If market is rising, and open interest is falling, the sign is BEARISH

If market is falling, and open interest is rising, the sign is BEARISH

If market is falling, and open interest is falling, the sign is BULLISH

What Next?

After understanding the trend, you can either act or study the stock by moving on to technicals and fundamentals.

That’s it. Follow this formula to increase your profits and sharpen your trading skills.

You can use our Trend Predictor tool to figure out OI trends as well.

Good luck.

1 Comment on "How To Interpret Open Interest Data"

  1. Sir, there are OI for lots of strike price. which OI should we take?

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