Open interest refers to total outstanding contracts in futures and options combined across all expiries and across all derivatives in stock market . Increase in open interest means traders are taking fresh new positions in market assuming price will go in direction of stock price movement.This can help with how to select stocks for intraday and to find which stocks to buy and sell. Swing traders use this as well
With help of Open interest data from the broker or exchanges, we can see positions that traders are making in futures and options stocks as well as Indexes. The positions are usually classified as Long built up, Short Builtup, Long Unwinding, and Short covering. Let’s understand what each of these represents
- LONG Built-up: When there is an increase in price and an increase in Open interest, we say traders are building long positions. It means that people are buying futures or options with anticipation that the price will go up.
- Short Built-Up: When there is a decrease in price and increase in Open interest, we say traders are building Short positions. It means that people are shorting or selling futures or options with anticipation that the price will go down. Usually, when some stock or index breaks support or reverses from resistance, we see shorts being built up.
- Long unwinding: When Share prices decrease and Open interest decrease as well, we say that longs are getting unwinded. This shows Long positions are now getting exhausted and people are starting to book profits, assuming the rally is about to over
- Short covering: When price increases and Open interest decreases, we say that Short covering is happening. In Short covering, the earlier built Short positions are getting decreased and people are booking profits and expecting a reversal.
Combined with volumes , this can serve as important indicator in selecting stocks for intraday or short term