What is OI?
It’s a measure of the amount of
money flowing into a
market. OI refers to the open or outstanding ‘buy’ or ‘sell’ positions created by hedgers or traders.
How do you calculate it?
Trader A buys an RIL stock
futures contract expiring on Apr 25 for say Rs 1,370 apiece. The contract has 1,000 shares as the underlying. Trader A creates OI of one contract . Trader B also places a buy order for one contract at Rs 1,370, so OI rises to two. Trader C decides to sell two lots at Rs 1,370 — one to trader A and the other to trader B. Thus OI is two long and two short. So the total OI is two. It is calculated single-sided instead of the sums of longs and shorts as for as for every buyer there is a seller and vice versa. As other buyers and sellers enter the market and create fresh positions, the OI rises. When one party closes out an existing position, OI reduces.
How does interpreting OI help in figuring out the market trend?
There are four relationships between OI and price.
If the price is rising and OI increasing, the trend is bullish. If the price is falling and OI rising, the trend is bearish. If the price is rising and OI remains steady the market has reached a top. If the price is falling and OI doesn’t increase much, the market has made a bottom.
What is the other benefit?
OI applies to index and stock futures and index and stock options. In the latter (options) there are call
options and put options. Call and put options are sold by option writers to buyers for a premium. The call
open interest and put open interest is calculated and the market trend can be determined in conjunction with prices. That will be discussed in the next edition.