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C. Raja Rajeshwari

What does open interest mean? — Kishore

In the futures and options market, an open contract means any contract - future or a put or a call- that has not been exercised, closed or expired. Open interest is the number of open contracts for a given future contract or option.

For instance, if the open interest for Nifty September futures is quoted as 253600, it means that there are 1268 long positions (253600 divided by market lot, which is 200 for Nifty) and 1268 so many short positions.

Increase in open interest: When a new long position (buy) is created, it means there is a counterparty, who is in the short position (sell). A initiates a long position and B takes up the short position. Together this long and short position increase the open interest by one contract. Vice versa, when a short position is initiated, the long position and the short position together increase the open interest by one.

Decrease in open interest: Open interest decreases with the exercise or squaring up of the contracts.

For instance, if a long position in a call is exercised, it is assigned to an open short position. On settlement, this long and this short position together get closed out. Hence the open interest gets reduced by one contract.

When the both the short and the long positions are closed then there is a decrease in the open interest. For instance, in the previous example of A&B, if both A and B close their positions, then A's long position is closed by short position and B's existing short position (sell) by buying a long position (buy). The effective net outstanding for both A and B is zero. Because of this closure, the open interest gets reduced by one contract.

No change in open interest: There is no change in the open interest, if just one position, either long or short is closed.

For instance, A initiates a long position and B takes up the short position. After some time, if A closes the long position by a short position (sell) and the buyer (long position) is C. Together this new long position of C and existing short position of B make one open position. Hence there is no change in the open interest.

Liquidity factor: In the futures and options market, liquidity of a contract is gauged from the trading volumes and open interest. When both volumes and open interest are low for a particular contract, this is an indication that there is not much trading interest at that strike price. The contract lacks liquidity. It is risky to hold illiquid contracts, as there might not be buyers or sellers when you want to square up the positions.

Significance: Looking at open interest over a period of time, it would suggest the prevailing sentiment about the underlying stock or index.

For example, when the spot price and open interest are both increasing, new long positions are being created (buying interest is evinced). On the other hand, if both the prices and open interest are decreasing, this is an indication that players are closing out their long positions (bearish sentiment prevails).

I wish to seek information regarding the final prices used for settlement of options and futures at the close of the final day. Since the mechanism shows numerous prices on the last day, it becomes very inconvenient to know the facts. The futures closing is different, spot is different. Please elaborate on this point since few sub brokers use different methods, which creates confusion as to what is an acceptable prescribed method. — Lamba

The settlement price used for the futures and options is different from the close price of the contracts. In the same way the settlement prices of the futures are different from the settlement prices of the options.

Futures: The daily settlement price of the future contracts is calculated as the half-an-hour's weighted average of the future contracts. This daily settlement price is taken for calculating the mark to margin.

On the other hand, for the final settlement on the date of expiry, the settlement price is the weighted average value or price of the index or security in the cash market segment of the NSE on the last trading day of the futures contracts.

Options: Options on individual securities have intermediate settlement and final settlement. Irrespective of whether it is for intermediate settlement or final settlement, the last half hour's weighted average price of the underlying security in the cash market segment of the NSE is taken.

# For index options contracts, exercise style is European style. Hence the settlement price on the expiry date is the last half hour's weighted average value of the underlying value in the NSE.

Availability: The settlement prices are available at the end of the day on a daily basis in the NSE Web site (www.nseindia.com)

How should I calculate put-call ratio? Where is it available? — Subramaniam

To calculate the put-call ratio — a vital statistic for the near-month contract — divide the total open interest of the near-month puts by the total open interest of the near-month calls. The details for this calculation can be obtained from the Bhavcopy, which is available at the end of the day on the NSE Web site. This ratio can be calculated for just that specific strike or for the immediate strike. In such manner, the put-call ratio can be calculated for different strike or for different months.

However, the put-call ratio of the forthcoming months is not considered, as it does not provide a clear picture of the prevailing sentiment. When the trading volumes in the contracts of the succeeding two months are compared with the near-month contracts, trading activity in these contracts does not pick up until the last week of expiry of the near-month contract.

The put-call ratio for the actively traded underlying contracts is available in the Sunday edition of Business Line. Also some financial sites such as wow-india.com publish it. Some of these sites offer such information on a payment basis.

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