NiftyMagician : Open Interest

[admin]

Definition of 'Open Interest' :
1. The total number of options and/or futures contracts that are not closed or delivered on a particular day.

Explanations :
A common misconception is that open interest is the same thing as volume of options and futures trades. This is not correct, as demonstrated in the following example:




-On January 1, A buys an option, which leaves an open interest and also creates trading volume of 1.
-On January 2, C and D create trading volume of 5 and there are also five more options left open.
-On January 3, A takes an offsetting position, open interest is reduced by 1 and trading volume is 1.
-On January 4, E simply replaces C and open interest does not change, trading volume increases by 5.


How Open Interest help to get in market directions :

[admin]

puts and calls in the market are created by call writers and put writers

1.call writers write the call options and sell them in the open market with the intention that a stock price cannot move beyond a level and sell them at a particular price -- so if they see that the price of stock moving beyond a point they just want to cover up the open positions and close the contract and thus the oi decreases
so call writers are considered as generally having a bearish view

2.put writers write the put options with the intention that the stock price wont fall further down and then sell a particular contract at a strike price in open market so if the value of the stock is falling down they tend to cover up their open positions otherwise they will be in loss
so put writers considered to be having a bullish view