In F&O trading, Open Interest plays a significant role. Along with any trading system one may have, using open interest data along with that will improve the trade outcome. One can identify the strength in the market direction using open interest. Some traders use only EOD data while some players use the same for intraday as well. So in this article, let's understand basics of open interest.

What is "Open Interest"?

Let's look at the literal meaning, there is an "interest" in a security which is "open" at that point in time. Open Interest is created when a new contract is created for trading, either a future contract or an option contract. Contracts are created by sellers (they are also called as writers as they "write" the contract to handover to the buyer).

Trading is executed when two parties with completely opposite view agrees on a price to exchange the contract. Seller creates the contract and hands over to the buyer.

Difference between Volume and Open Interest

When a new contract is created as explained above, total outstanding contract is one and traded volume is also one. When the buyer of the contract decides to sell, but to a fresh buyer, not to the original seller, same existing contract is just handed over and no new contract is created. At this point, open interest remains the same, one but trading volume increases to two.

When the new buyer decides to sell the contract and it is bought back by original seller, then contract gets extinguished. Open interest drops to zero while trading volume becomes 3 now.

Volume just says the number of times a contract is exchanged hands while open interest says the number of contracts that are still open to be closed/exercised.



Interpretation of Open Interest and Volume with Price



Open interest is one variable that many F&O traders use in their analysis of the markets used in conjunction with other analysis to support trade decisions. Large changes in open interest can be an indicator when certain participants are entering or leaving the market and may give clues to market direction.

Learn about FII OI data interpretation here.