20. What Is Open Interest in Options?
Open Interest (OI) refers to the total number of active, outstanding options contracts that are yet to be closed, exercised, or expired.
It represents how many contracts are currently open in the market for a specific strike price and expiry.
OI is one of the most important indicators in options analysis, as it gives insight into market activity, trader participation, and potential support/resistance zones.
Understanding Open Interest
Open interest is:
- A cumulative measure — it increases when new contracts are created and decreases when contracts are closed
- Specific to each strike price and expiry date
- Updated in real-time as participants enter or exit positions
It shows how many contracts are live in the system, giving a clear picture of market commitment at each level.
How Open Interest Is Created and Changed
| Action | Effect on OI |
|---|---|
| A buyer opens a new position and a seller writes a new contract | Increases (+1) |
| A buyer or seller closes an existing position (square off) | Decreases (–1) |
| Both buyer and seller square off existing positions | Decreases (–1) |
| A trade occurs between two existing open positions | No change |
Key Point: OI reflects new capital entering or exiting the market. It is not affected by simple ownership transfers.
Open Interest vs Volume
| Metric | Definition | Behaviour |
|---|---|---|
| Volume | Number of contracts traded in a single day | Resets daily |
| Open Interest | Total number of outstanding contracts still open in the market | Accumulates over time |
- Volume = trading activity
- OI = market participation
Both are used together to assess liquidity and momentum.
Example of Open Interest
Suppose OI for the Nifty 22,500 Call Option = 1,20,000
- If 500 new contracts are added → OI becomes 1,20,500
- If 1,000 existing contracts are closed → OI becomes 1,19,500
Thus, OI reflects net open positions, not total trades.
How Traders Use Open Interest
1. To Assess Liquidity
- High OI → more active market, tighter spreads, easier entry/exit
- Low OI → illiquid, wider spreads, harder to trade
2. To Gauge Market Sentiment (with Price)
| Price Action | OI | Interpretation |
|---|---|---|
| Up | Up | Bullish build-up |
| Down | Up | Bearish build-up |
| Up | Down | Short-covering rally |
| Down | Down | Long unwinding or profit booking |
3. To Identify Support and Resistance
- High Call OI → Possible Resistance
- High Put OI → Possible Support
Example:
- Nifty highest Call OI at 23,000 → market may face resistance here
- Highest Put OI at 22,500 → market may find support here
Where to See Open Interest
- Most trading platforms show OI in the Option Chain
- Data is strike-wise and expiry-wise
- Change in OI shows where new positions are being built
Example:
| Strike | OI | Change in OI | Price |
|---|---|---|---|
| 22,000 | 95,000 | +10,000 | ₹110 |
| 22,500 | 1,20,000 | +15,000 | ₹65 |
| 23,000 | 1,60,000 | +25,000 | ₹32 |
Here, the 23,000 strike has the highest OI → indicating strong resistance.
Key Takeaways
- Open interest is the total number of outstanding option contracts still active.
- It increases when new positions are opened and decreases when positions are closed or expire.
- It is used to measure liquidity, market sentiment, and trader positioning.
- Open interest is not the same as volume — volume resets daily, but OI is cumulative.
- Traders use OI with price action and change in OI to interpret trend strength and possible reversal zones.