Slideshow

Cheap Web Hosting Sites

Social Icons

'

Tuesday, August 23, 2011

Open Interest and Its Implications

Open Interest is nothing but numbers of future contracts (or option contracts) that are not closed or delivered (or settled in countries where contracts are settled in cash) on a particular day.
Unlike US, where contracts are delivery-settled, in India contracts are still settled in cash. Open interest is often misunderstood with volume but both are two distinct things.
Let’s see how Open Interest and volume differ-
Volume or Traded Quantity tells us how many contracts were traded on a particular day.

Day
Trading Activity
Open Interest
Volume (for that day)
1
A buys 2 Contracts , B sells 2 contracts
2
2
2
C buys 10 contracts, D sells 10 contracts
12
10
3
A sells 1 contract, B buys 1 contract
11
1
4
A sell 1 contracts, C buys 1 contract
11
1
5
B buys 1 contract ,E sells 1 contract
11
1
6
 E buys 1 contracts , F sells 1 Contracts
11
1
7
G buys 5 contracts, H sells 5 contracts
16
5


When both buyers and sellers are new and when they trade 1 contract, Open Interest increases by 1 contract, when both buyers and sellers are old and trade 5 contracts Open Interest decreases by 5.When a new buyer and an old seller (or an old buyer and a new seller) do the transaction of 10 contracts, open interest remains the same.

Ø  Old Buyer + New Seller trades a contract         à OI Unchanged
Ø  New Buyer + Old Seller trades a contract         àOI Unchanged
Ø  Old Buyer + Old Seller trades a contract           àOI Decreases
Ø  New Buyer + New Seller trades a contract        à OI Increases

SN
Transaction
Effect on Open interest(OI)
1
One new buyer and one new seller of  1 contract
OI increases by 1
2
One new buyer and one old seller ( covering his bought contract )
OI unchanged
3
One new seller and one old buyer( covering his sold contract)
OI unchanged
4
Old buyer and old seller covering their positions
OI decreases by 1


What indication Open Interest conveys

Price Increase 
Price Decrease
Open Interest  Increase
Long Built Up
Short Built Up
Open Interest Decrease
Short Covering
Long Liquidation

0 Comments:

Post a Comment

Related Posts Plugin for WordPress, Blogger...