Open Interest represents the total number of outstanding option contracts that are open and active in the market. These are positions that have not been closed, exercised, or expired. It reflects trader participation and the liquidity of a contract.
Key Points:
- OI increases when a new buyer and seller create a position.
- OI decreases when both parties square off their positions.
- It is a stock-level indicator, not specific to individual traders.
Interpretations:
- ↑ OI + ↑ Price = Long Build-up → Bullish Signal
- ↑ OI + ↓ Price = Short Build-up → Bearish Signal
- ↓ OI + ↑ Price = Short Covering → Bullish Continuation
- ↓ OI + ↓ Price = Long Unwinding → Weakness, Bearish Signal
Uses:
- Helps identify the strength of a trend.
- Detects zones of potential reversals or breakouts.
- Acts as a filter to validate volume-based or price-based analysis.
Example:
- If Call OI is highest at 22,500 and increasing steadily, it may act as a resistance level, as sellers expect price to stay below it.