Many traders investing in the futures market end up losing money on the futures market and options market. The most common error they make is that they’re not evaluating the open interest. Open Value is one of the key criteria in futures market trading. If we begin to evaluate open interest in volume and price, the traders will have a high likelihood of success in their trades and will also improve their profitability in the futures and options market.
Understanding Open Interest with respect to Volume
Open Interest is a particular statistical feature when trading in the market of futures and options. Open Value is the total number of contracts currently in existence and is not offset by transactions being terminated. Open Value varies from volume. Volume is the number of contracts which are traded daily. When you buy a future / option then you open a position and the person who sold you open a position, too. The volume increases by one, and open interest will rise by one as well. If you sell your future / option to someone else who had no market position then the value will increase but the open interest will not shift because you passed the open interest to someone else who had no market position earlier.
If you had sold the place to someone who already had a position on the futures/options market, Open Interest would have decreased. Since you are closing positions, open interest goes down where the volume rises by one.
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How to analyze open interest data?
For both portfolio futures traders and option traders, open interest is relevant. Open interest indicates where the traders put their money in. Hence it is very important to evaluate open interest. Let’s examine the open interest data in the futures market with the aid of a stock.
Because of the inevitable drop of prime options, there are generally large numbers of option sellers on the market. The benefit is max the premium value of the option offered for option buyers, while the risk of loss is unlimited. Hence, these option sellers are usually very nimble-footed and flexible in the event of any adverse movement to square off their positions. Now, if we look at the market, we’ll see the bullish players selling put options as they get premium if rates don’t go below the price of the strike. Likewise, the bearish players offer options for calling as they look for profit if the rates do not meet the strike price.
If the open interest in any specific strike price of calls and puts of a stock is strongly built up, that means market participants see those rates as potential support or resistance areas, depending on the option being called or put in.
To know more about Stock Investment, you can visit our website https://www.jayantharde.com or contact our representative at +91 712 2282029 or meet us at 51, Gurukripa, Old Sneha Nagar, Wardha Road, Nagpur – 440015.
Source: https://hardejayant.blogspot.com/2020/03/how-to-use-volume-open-interest-to-enhance-profit.html
