InvestorQ : How is open interest created in the options and futures market and what it implies?
shrinidhi Rajan made post

How is open interest created in the options and futures market and what it implies?

Answer
image
Riya Dwivedi answered.
3 years ago
Follow

One of the key aspects that analysts and traders normally tend to look at is the Open Interest (OI) data. OI refers to all positions that are still open. Let us understand this with a practical example. Let us understand the steps to the creation and reduction of open interest with respect to futures.

Scenario 1: A buys 1 lot of Nifty Futures and B sell 1 lot of Nifty Futures, and then the market OI in Nifty is 1 lot. If both A & B decide to reverse their positions then the OI of the Nifty will come down to 0.

Scenario 2: A buys 1 lot of Nifty Futures and B sell 1 lot of futures, creating a market OI of 1 lot. The next day, A sells his 1 lot to C. The OI of the Nifty still remains at 1 lot as only 1 party is replaced.

Scenario 3: A buys 1 lot of Nifty Futures and B sell 1 lot. At the same C buys 1 lot of Nifty futures and D sells 1 lot. Similarly, E buys 8 lots of Nifty Futures and F sells 8 lots. In this case the total OI of the Nifty Futures will be 10 lots.

In short the OI of the Nifty contract will keep expanding as new participants keep initiating fresh positions in the Nifty. That is the crux of the concept of OI.

0 Views