How to read the Open Interest movement in options? Is the OI in options for the buyers or sellers, and how to identify the trend?
Tarun Gulati
An Open Interest (OI) is created only when there is a buyer and a seller like any other transaction that has two sides. While volume indicates the number of trades or the total transaction value, OI indicates the positions that are held by the participants at that time.
To identify the trend, we should always see the OI movement in conjunction with the price movement.
There are four possible scenarios as mentioned below:
One, both price and OI increases. This means long build-up — even as the price is increasing, there are new buyers coming in which is bullish.
Two, price decreases but OI increases. This indicates short build-up — the opposite of long build-up.
Three, price increases and OI drops. This shows that existing shorts are being covered. Meaning, participants are not as bearish as before. It can even be taken as a hint for bullish reversal.
Four, both price and OI decreases. Here, longs are being unwound. Shows that participants are not as bullish as before and it can be an early sign of the trend turning bearish.
Another factor that you should consider is that selling options require more margin and are usually done by institutions and professional traders. They are generally deemed to be right most of the time and that is why when you see the maximum number of OI in a particular strike, it is said to be a strong support/resistance.
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