Open interest (commonly known as ‘OI’) is the total number of outstanding contracts that are held by market participants at the end of the day. In other words, it can also be defined as the total number of futures contracts or option contracts that have not yet been exercised (Squared off), expired, or fulfilled by delivery.
Open interest is usually helpful to confirm trends and trend reversals for futures and options contracts. The way to predict future movement of markets.
Each ‘buy’ position has an equal and opposite ‘sell’ position. Only then will a contract come into existence.
So when we calculate the open interest, we should not take both the positions into account. This is the common mistake made by many. Only one side – either the buy or the sell side should be taken into account.
Each trade completed on the exchange has an impact upon the level of open interest for that day.
It is very important to monitor open interest each day – the incremental value.
Any increase in the open interest value means that new money is flowing into the marketplace. The result will be that the present trend will continue – it may be upward or downward trend, which is likely to continue. (as more contracts are building in this trend)
Any decrease in the open interest means that the market is liquidating and implies that the prevailing price trend is coming to an end.
Primarily all the FNO players track the open interest positions very minutely, by plotting each days open interest and trying to analyse a trend.