Did you try to know about the open interest of the options by asking here and there and watching YouTube videos, reading lengthy blogs, etc? Let’s debunk the 5 big myths related to open interest one by one.
Myth 1: Volume and Open Interest are the same
Many people think that open interest and volume are the same thing but they are not. Volume, where the total sole shares or contracts are represented in a time period, tells the open interest that how many contracts are open in the stock or index. Remember that volume applies to equities and derivatives, but open interest only applies to derivatives.
Myth 2: Open interest remains constant
The figure of open interest keeps changing all day. As the buyers and sellers take positions or exit, the total number of open contracts increases and decreases. That is, open interest also keeps going up and down.
Myth 3: Open interest represents the total number of trades
By looking at open interest, one can find out that the value of any underlying asset is going up, down or sideways. In plain terms, open interest tells us the changes happening in the market sentiment. Suppose, open interest has increased on a strike, which means that new contracts are being made. When open interest is less, it means that traders are closing their previous contracts which simply means keep an eye on open interest.
Myth 4: Open interest alone is enough for trading decisions
Trading will help a lot. Yes, it is not that it will work alone with open interest. To know this, open interest plus price data must be seen together. For example, if open interest is increasing and the price is also increasing then this is an indication of a bullish trend. On the other hand, if the price is decreasing and open interest is increasing, then it can be considered a bearish trend.
Myth 5: Open interest predicts market direction with certainty
It is true that with open interest, you can spot the support and resistance levels of the stock or index and that is why it helps in entering and exiting a trade but before making any trade, one should always look at the price chart and confirm the support and resistance level.
Pull up the Upstox Power Packed Option Chain. Find open interest, change in open interest, price and ten plus data points on your screen. Just go to the Futures and Options section on the Upstox App, go to Options AI Analysis and you will get option interest data. Click to know more about Upstox Option Chain: https://upstox.com/option-chain/