About open interest, wanted to check if i am correct

for example, the strike price 11000 CE has high open interest, does it include both buys and sell of 11000 CE , however i read , it has maximum interest because of call writers?? if yes, what about buyers who bought it? its high only because of writers?

The Total OI on any given Strike of CE or PE includes both the buyer and the seller. Each quantity of Open Interest in the Option Chain represents a buyer and the seller at the same time.

Writing / Selling Options needs larger amount of Margin . So it is assumed, that since the writers have bigger pockets then the buyers, a call / put writer is better informed than the buyer of these options.

Hence in the larger scale of things only the Rich Writers are mentioned, the Poor buyers presence is more or less irrelevant.

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What you have to understand is the difference between stocks as traded with cash and contracts(F and O).

stocks are created and issued by the company.

F N O are created by the seller first. The seller can be anyone , market makers , institutions, even retail.

OI is created when seller opens a futures contract or writes an option. Only then a FNO contract can be bought.

OI is destroyed when open contracts are destroyed or closed.

Whether you want be on the buy or sell side of F N O depends on your view and your objective.

if you are market maker your job is primarily write options.

For retail , it is best to buy options rather than sell.

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nicely explained :+1:

thanks you sir, this is the answer i am waiting for, one more question, if open interest is high in particular strikes, they dont think it wont cross the strike??? right??

@sristock

No, its not not like you think it is. They DONT act like support or resistance.

Understand that option prices are highest ATM, which mean higher premium , which means more selling. So who are the people selling ATM taking big risk?. In reality its the option market makers who are incentivesed to provide liquidity and in doing so they are delta hedged to reduce their risk. Remember risk is unlimited when you sell option, but market makers are not fools to take unlimited risk. They are hedged.

the reason OI is high at particular strike is because the futures price is trading ATM for that strike. They don’t act like support or resistance.

So they will cross the strikes where OI is high.

don’t think you can just look at high OI at certain strikes and think they will act like support or resistance by looking at price action. Its tooooooo easy , there is no edge to be found here.

High OI at strikes is publicly available info and any one can see that by just looking at the option chain.

the maximum interest is because of call writers… why ?
why not because of call buyers ? this is your question

let us take nifty spot is 10600. nifty 11000ce is at 30. so premium is 40 x 75 = 3000 rupees. Now option buyers has to 3000 rupees buy own contract of 11000ce. so he places a buy order. there is a chance that this 3000 rupees to get lost if nifty decreases and closes below 11000 on or before expiry.

now think of the seller ? if he has to sell nifty 11000ce at 40. if he has 3000 rupeess can he place a sell order ? no … he needs 60000 rupees to sell one lot of nifty 11000ce. there is a chance that this 60000 rupees to get lost if nifty increases and closes above 11800 on or before expiry. (800 x 75 = 60000).
if closes below 11000 seller may get 3000 profit.

So just because you place 100 lots of buy order in nifty 11000ce. do not imagine that the trade is getting executed. for a buyer a who takes a risk of 3000 rupees , there is must be a seller who takes a risk to loose 60000 rupees which is almost 20 times more. !!!

So only if sellers is ready to risk he will place a sell order… So that is why we say every open interest created in the Derivative segment is because of the opportunity provided by option writer (seller) .

You have seen many articles stating execute trade with risk reward 1:2 that means 1 rupees risk to be taken to get a profit of 2 rupees.

Please think OPTION WRITER is not a FOOL to risk 60000 rupees to get a profit of rs3000 which is a risk reward of 20:1.

they are very confident that nifty will not move to 11000 . above all … they are clever. they always have a clear plan with hedged positions…
Option 1 - . If nifty moves to 10800, they will exit the position with small loss and shift to 11200 or 11400 or 11600…
option-2
they will be 11200ce for 20 rupees. so even if nifty moves by 1000 points above , their loss is limited.

Thank you so much , got clarity, was bit confused till now, now cleared :slight_smile:

Thank you so much for answer, i have a doubt here, in option 2, they buy 11200CE to limit loss? am i correct? is it like option sellers buy only for hedging?

they buy 11200ce to save them from very high volatile moves . Due to news , nifty jumps 500 points so their loss will be limited. it is for hedging against big fluctuations.

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