Rajandran R Founder of Marketcalls and Co-Founder Algomojo. Full-Time Derivative Trader. Expert in Designing Trading Systems (Amibroker, Ninjatrader, Metatrader, Python, Pinescript). Trading the markets since 2006. Mentoring Traders on Trading System Designing, Market Profile, Orderflow and Trade Automation.

Interpreting Options Price and Open Interest Relationship

1 min read

We know that Open Interest is nothing but the total number of outstanding contracts. And for Options we have Open Interest for every individual strike price. It is a myth that 90% of the option expire worthless. Textbooks, Internet & even most of the option experts preach that option writing is smarter than buying options . But is that true? However check out the real facts from Chicago Board Options Exchange (CBOE).

  • 10% of option contracts are exercised
  • 55%-60% of option contracts are squared off  prior to expiration
  • 30%-35% of option contracts expire worthless (out-of-the-money with no intrinsic value)

What is the Relationship Between Option Price and Open Interest

Below is the simple strike wise options interpretation from optionaction about the days option price change and Change in open interest compared to the previous day option price and open interest. This simple interpretation helps one to understand and get a bird eye view of whats happening across the strike price. Generally it tracks whether at a particular strike price Long buildup/Short Buildup/Short covering/Long Liquidation is happening.

For Example on 18th Nov 2016 most of the ATM calls and ATM Puts premium (Option Price Value) declined despite the underlying nifty spot price closed flat (Nifty was down by 5 points) and November expiry is nearby and almost 4 more trading days to go. If you notice that price value is going down however open interest is getting increased that indicates that option sellers are in control in both ATM/near to ATM calls & ATM puts option strikes.

 

options-open-interest-relationship

Here is the generalized table which list out the relationship between  Change in Option Price and Change in Open Interest

Change in Option PriceChange in Open InterestInterpretation
PositivePositiveLong Buildup
NegativePositiveShort Buildup
PositiveNegativeLong Liquidation
NegativeNegativeShort Liquidation

Note that for Every option buyers there is a option seller whenever the open interest count increases by 1. The above relationship only tracks which participants are more aggressive on that given day.

Steps to Get Open Interest Relationship in Option Action

1)Download Option Action

2)Register and Login to Option Action

3)Goto Option Chain Tab -> Enter the required Symbol and press update

4)Bingo! You are done.

Advantages of Interpreting Open Interest

1)Understand the dynamics of options marketplace
2)Track the behavior of participants before any major events, pre/post earnings announcements
3)Re-Adjust or Revise your trading strategy according to what is happening in the market
4)Bird Eye view about the market dynamics.

Rajandran R Founder of Marketcalls and Co-Founder Algomojo. Full-Time Derivative Trader. Expert in Designing Trading Systems (Amibroker, Ninjatrader, Metatrader, Python, Pinescript). Trading the markets since 2006. Mentoring Traders on Trading System Designing, Market Profile, Orderflow and Trade Automation.

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