Open interest is one of the most quoted numbers in Indian derivatives, and one of the most misread. It sounds like a measure of conviction or money flow. It is neither. It is simply a count.
The definition
Open interest (OI) is the number of futures or options contracts that have been opened and not yet closed, exercised or expired.
Every contract has two sides, a buyer and a seller. When a new buyer trades with a new seller, one contract is created and OI rises by one. When both sides are closing existing positions, a contract disappears and OI falls by one. When one side is opening and the other is closing, the position simply changes hands and OI stays the same.
That last case matters: volume can be huge while OI barely moves. Volume counts trades. OI counts positions still standing.
Reading OI with price
On its own, OI tells you almost nothing. Paired with the direction of price, it gives a rough picture of what kind of positions are being built or closed. The classic four-way reading for futures:
| Price | Open interest | Usual label | What it suggests |
|---|---|---|---|
| Up | Up | Long build-up | New buying is driving the move |
| Down | Up | Short build-up | New selling is driving the move |
| Up | Down | Short covering | Shorts are exiting, pushing price up |
| Down | Down | Long unwinding | Longs are exiting, pushing price down |
This is a useful vocabulary, and you’ll see it on every Indian broker’s screen. Treat it as a description of what happened, not a forecast of what happens next.
OI in options: the “wall” idea
In index options, traders watch which strikes carry the most OI. A strike with very large call OI is often read as resistance, and a strike with very large put OI as support. The logic is that option sellers (who are usually larger, better-capitalised participants) have something to defend there.
It’s a reasonable starting point, with three big caveats:
- You can’t see who is on which side. High call OI at 25,000 means many calls exist at that strike. It does not tell you whether the sellers are confident, hedged, or about to be forced out.
- Walls move. OI is rebuilt throughout the day. A “wall” that held at 11 am can be abandoned by 2 pm, and the chart will make it look like it was never there.
- Expiry distorts everything. Near expiry, OI concentrates around the current price simply because that’s where trading is most active. That isn’t necessarily a signal.
How to use it well
- Use OI as context, not a trigger. It is good at describing the positioning backdrop. It is weak as a stand-alone entry signal.
- Watch the change, not the level. The change in OI during the session (often shown as “COI”) says more than the absolute number.
- Always read it with price. OI rising without a price move is ambiguous. OI rising with a decisive price move is much more informative.
- Be sceptical of neat stories. If a single number seems to explain the market perfectly, it usually explained it after the fact.
Next: the put-call ratio, which is built directly from option OI.