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Why tracking Open Interest helps
The stock market has many segments. The most basic segment is the direct cash segment, where you buy and sell shares in exchange for money. The next segment is that of the futures and options market, where you trade contracts – agreements that you will buy or sell shares in the future. This market works a lot differently than the cash segment.
Trends in the derivatives market help us understand the spot market. One such factor to be considered is ‘Open Interest’. Here are a few things to know:
What is Open Interest:
Open Interest is the number of contracts or commitments outstanding in futures and options trading on an official exchange at any one time. Every derivative contract comprises of a buyer and a seller and that contract is said to be open until both the participants don’t close out their positions. i.e. square off their positions. For eg: Open Interest of Nifty Futures on 6th March, 2014 was 1.58 Cr shares which indicates that there are 1.58 Cr long positions and 1.58 Cr short positions on that day which are yet to be squared off. Higher the open interest in any derivatives contract, higher are the number of participants carrying their open positions and vice-versa. Change in open interest indicates the increase or decrease of participation at different price levels.
Why monitor Open Interest:
Tracking Open Interest helps you to understand the likely future trend of the market. This is because it helps measure the flow of money into the derivatives market. So, an increase in Open Interest means money is flowing into the market. The opposite means the traders are selling off their positions to liquidate. This means, the current market trend is likely to come to an end.
Tracking Open Interest along with the change in prices of contracts helps give a better picture. A change in prices is a reflection of the demand. It also indicates the markets sentiment.
A rise in price means demand is increasing. If along with that, the number of open positions increases, then it means that market is strong and likely to rise in the near future. However, if Open Interest is falling, then it indicates that the market is weakening.In contrast, a fall in price means demand is down. This reflects the fall in confidence. If open positions rise at this time, then it means the market is weak, and traders are preferring to short the market. However, if Open Interest falls, it is an indication that the market might change its trend in the near term.
Rs 1,36,165 Crs
According to data from the National Stock Exchange, Open Interest for March 2014 stands at Rs 1,36,165 Crs. This is drastically up from the Open Interest positions worth Rs 85,693 Crs at the start of the fiscal year in April 2013.