How is Open Interest Calculated?

All Option Strategies

What’s the use of rowing a boat without an oar? Similarly, if you are someone who is enthusiastic about options trading, then you should be aware of the open interest. But the question here is, how is open interest calculated? 

There are various ways in which you can calculate the open interest. With the calculation of the open interest, you can effectively find out the change in open interest and then find ways to trade.

But before diving into how open interest is calculated, let us have a look at what exactly is open interest!

So, let’s begin!

Open Interest in Options

Do you also find options trading very tricky? If so, then you can break it down and make it simpler for yourself by understanding all the concepts in detail. 

Open interest as the name suggests refers to the open option contract positions. This means that all the option contracts that are outstanding in the market, comprise the open interest. And when it comes to whether you have the Open Interest Calculated or not, it may become a bit complex too. 

But, wait. Let’s try to break it down with the help of an example.

For instance, if Rahul buys 10 option contracts and Sangeeta sells 5 option contracts, then there are 15 new positions that are created in the market. Therefore, the open contract in such a case will be 15. 

If Rahul decides to execute his 4 option contracts, then the OI will decrease by 4. 

So, the here the high and low open interest option depicts the sentiment of the market. Therefore, let us now dive into the details of how to calculate open interest in options. 

How is Option Open Interest Calculated?

You can easily get Open Interest Calculated for options and analyze the market according to that. It also helps you in taking the trading decisions, when complemented with price and volume. 

To define it in simple language, you can calculate the open interest by clubbing and adding all the new and open contracts. This means that every time a new buyer or seller enters the market, the open interest increases by one. 

Similarly when a trader decides to execute an option contract, then the open interest decreases by one. 

Since there is always a fluctuation in the open and executed positions, the open interest also changes accordingly. 

Open Interest Calculation Example

Does the concept of open interest seem to be confusing? If yes, then here we are with the complete explanation with the help of an example. 

Suppose there are 3 traders, Rishi, Aradhna, and Kajol.

Now, on Monday Rishi buys 8 option contracts, Aradhna buys 2 option contracts, and Kajol comes in and sells 4 option contracts. So, there are 14 new positions in the market. This makes the OI 14 on Monday.

 

Now, on Tuesday, Kajol wants to exit her 2 positions and Anil comes over and takes this position. Now, carefully observe that there were no new positions created in this case, therefore, there will be no change in the open interest. 

 

After this, on Wednesday, Rishi squares off his 8 contracts and therefore the OI will change and decrease to 6. In this case, the positions are being exited, therefore the OI or open interest will change. 

 

With this open interest calculation example, it is clear how open interest in options is calculated and how you can also do it. 

Hence low and high open interest in option chains plays an important role in the determination of bullish or bearish trends or on your trading decisions as well.

The only open interest calculation formula is summarized in the given points. 

  • Every new position increases the open interest. 
  • If the position is getting transferred from one trader to another, then the open interest remains constant. 
  • Every time a contract is squared off, the open interest decreases by one. 

Open Interest Analysis 

Now, when you see a fluctuating open interest in options, you can make a trading decision based on that. But you have to keep one thing in mind that you cannot overlook the price. 

So let us see how open interest and its changes affect the trend in the market. 

 

Not only this the right calculation helps you in understanding open interest vs volume that further helps you in options analysis and hence in making trade decisions.

Conclusion 

Options trading is a tricky business but with the right mindset and options strategies, you can ace this as well. 

So like technical analysis of stocks gives a signal of market trend and helps traders to trade in stocks, similarly, the open interest tells a trader how many options contracts are outstanding and therefore is a good indication of the market trend and your trading decisions. 

Open your Demat account today and start trading in options, and have a great journey!

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