What is Change in Open Interest?
Open Interest (OI) is an options market measure that shows the total number of outstanding contracts traders hold at the end of a trading day. The open interest is computed by summing all contracts that have been purchased or sold but have not yet been offset or expired. Change in Open interest is the difference between the current day’s open interest and the prior trading session’s open interest.
Benefits of Change in OI for Options Trading
The shift in open interest can give options traders with helpful information. Here are some of the advantages of tracking changes in open interest:
Recognising Market Sentiment
One of the primary advantages of tracking changes in open interest is that it can assist in determining market mood. When open interest for a particular option rises, it indicates that more traders are opening new positions in that option, which may indicate a bullish sentiment towards the underlying asset. When the open interest for a certain option decreases, it indicates that traders are closing out their holdings, which might imply bearish sentiment for the underlying asset.
Confirming Trends
Another advantage of tracking the change in open interest is that it can aid in confirming trends. For example, if a stock is in an uptrend and open interest in call options on that stock is growing, it might indicate that market sentiment is positive. Similarly, suppose a stock is in a downtrend and interest in putting options on that stock is growing. This might indicate that market sentiment is gloomy, and traders are bracing for greater losses. Traders are setting themselves up for additional gains.
Identifying Potential Levels of Support and Resistance
The Change in Open interest is utilised to assess potential levels of support and resistance. For example, suppose the call option open interest is strong at a specific strike price. In that case, it might suggest a considerable degree of positive emotion, which could be a resistance level for the stock.
Similarly, suppose the put option open interest at a certain strike price is large. In that case, it might suggest a considerable degree of bearish sentiment at that level, which could operate as a support level for the stock.
Identifying High Liquidity Options
Traders can discover options that are becoming more popular and hence have the potential for high liquidity by watching changes in open interest. Change in open interest may also be utilised to identify options with high liquidity. Options with a large OI typically have narrower bid-ask spreads and higher trading volumes, making them easier to trade and possibly more rewarding for traders.
Avoid Unusual Activity
Finally, use the change in open interest to avoid unusual activity. Traders can avoid options prone to unusual activity and perhaps avert big losses by watching fluctuations in open interest. Unusual changes in open interest might indicate insider trading or other sorts of market manipulation.
Conclusion
Tracking changes in open interest can provide options traders with useful information. Traders may make better-educated trading decisions and boost their profitability by analysing market mood, validating trends, finding possible support and resistance levels, locating options with high liquidity, and avoiding odd behaviour. As with any options trading strategy, it is critical to employ various tools and indicators in tandem with changes in the market.
