Open Interest
Open interest is the total number of outstanding futures or options contracts that have not been settled, exercised, or closed. NSE publishes daily open interest data for all F&O instruments, and changes in open interest are widely monitored as a proxy for market participation and conviction.
Open interest increases when a new buyer and a new seller enter a contract simultaneously, and decreases when an existing position is closed or squared off. It is distinct from trading volume: volume counts every transaction during the day, while open interest reflects only positions that remain open at the end of the trading session.
In Indian derivatives markets, open interest data at specific strikes was used to infer potential support and resistance zones. Large accumulations of open interest in put options at a particular Nifty strike were sometimes interpreted as indicating where significant hedging or support interest existed. Similarly, large call open interest was interpreted as a potential overhead supply zone. These interpretations, however, are observational rather than predictive.
Changes in open interest alongside price movement were analysed using a four-scenario framework. Rising price with rising OI suggested new long positions were being added, interpreted as a bullish build-up. Falling price with rising OI suggested new short positions, interpreted as bearish. Rising price with falling OI suggested short covering, and falling price with falling OI suggested long unwinding. While this framework was widely used on Indian trading desks, it was a qualitative heuristic rather than a rigorous analytical tool.
A common misconception is that high open interest at a strike guarantees that the market will be pinned near that level at expiry — a concept called max pain. The max pain theory suggests the underlying will gravitate toward the strike where the most options expire worthless, minimising aggregate payouts. While this has occasionally aligned with market outcomes, it is not a reliable standalone framework and should not be treated as a predictive tool.
Open interest rollover data is monitored around monthly expiry to gauge how much of the current month's positions are being carried to the next month. A high rollover percentage in Nifty futures was historically interpreted as participants maintaining their directional views into the next series.