How To Use Open Interest For Intraday Trading?
Open interest trading strategy is being used for guidelines and analysis.
Don’t expect sure-shot points from this strategy.
But open interest trading strategy will be helpful for the prediction of the market.
What Is Open Interest?
Open interest trading strategy is also known as the open contracts or open commitments that refers to the outstanding derivative contracts that have not yet been settle.
How to use open interest for intraday trading ?
For example, if a person buys one option and sells one option, we say open interest is 1.
If one person buys eight lots and the other person sells eight lots, then the open interest is 8.
Open interest trading strategy will give information regarding the liquidity of the option.
The more is open interest, and the more will be the of buyers and sellers.
Open interest can tell us a lot about the market trend and market sentiment.
Primarily If you are an options trader.
But most of the option traders tend to neglect this beautiful data as it looks pretty heavy and complex.
But if you know how to apply this open interest strategy, it can be very much helpful for analysis.
I am here to tell you how to use the idea of this open interest trading strategy.
And also how to use this data to empower your trade analysis.
Applying this open interest trading strategy to your analysis gives you beautiful insights into the money flow in the stock/index.
How to use open interest for intraday trading And What Does This Open Interest Tell Us?
It is simple; open interest keeps track of the number of open positions in the market.
It also tells us whether traders are entering the new trades or closing out their existing trades.
When more new traders are buying the stock or selling the stock, open interest will increases.
When more traders are closing/exiting their positions, the open interest of the stock decreases.
This increase and decrease in the open interest will be mentioned in the option chain as the change in OI.
This open interest and the change in open interest both will give information about the stock.
Option sellers have more information than option buyers.
For selling the options, they require more capital.
Most of the option sellers are either big traders /institutional traders.
These guys have more information at any given time than the retail option buyers.
Always look at the option chain from an option seller’s perspective than an option buyer’s perspective.
It is how big traders move their funds from one strike price to another price.
Call sellers are always bearish on the stock, and put sellers are always bullish on the stock.
These Are The Four Conditions That Tell Us Scenarios About The Market.
- When the price goes up along with the open interest, it tells us that more buyers are entering into the stock; we can assume that the buying trend will continue.
- Both price and open interest are decreasing, which means that the buyers are exiting their long positions, indicating a possible and trend reversal in the near or future.
- If the price goes down and the open interest keeps going up, the sellers enter the stock, leading to a bearish trend.
- Lastly, price going up and the open interest going down indicates that the sellers are exiting their short positions, indicating a possible trend reversal.
These are the four scenarios that are combining the change in price and the change in OI.
How to use open interest for intraday trading ?
This open interest trading strategy works well to find short-term trends – say for the next 1 or 2 days.
Do not use these open interest trading strategies in stock options that do not have liquidity/ volume.
Open interest keeps changing repeatedly, and It may not be constant until the end of the month.
Option seller’s strake is very high; he carries unlimited risk, option buyers carry limited risk.
Where to find these values for an open interest and How to use open interest for intraday trading ?
Values of OI and percentage change of OI will be available on the NSE website.
Among the put option where there is a highest open interest, then it is considered as support.
Among the call options where there is the highest open interest, it is considered as resistance.
Go to the NSE website, select the live market, from that go to the option chain, select equity derivatives and select the monthly expiry date.
For example, if the 13000 nifty put option has the highest open interest rate up to 40lakhs.
From this, you can assume that for the month of expiry, 13000 put option is the support, in that price 40 lakhs shares have brought and 40 lakhs shares have been sold.
It is a place where a maximum number of buyers are there, and many sellers are there.
Open interest trading strategy can mark the strong resistance and support for better and probable trade.
What Are The Target And Stoploss? How To Use Open Interest For Intraday Trading ?
- Monthly and weekly support and resistance are the target and stop-loss.
- If you had entered call option trade, your target would be the next resistance.
- If you had entered put option trade, your target would be the next support.
- I will prefer nearly the next resistance and support, whether weekly or monthly.
- All these indicators, support, and resistance will available at the trading view, and open interest levels would be available under the website NSE.
- The trading view platform will make your work more efficient and accurate.
- If you follow the above rules strictly, open interest trading strategies are the most profitable and probable trades.
These types of trades will be more practical and most probable and this article will be helpful to How To Use Open Interest For Intraday Trading ?
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