How to take directional view of scrip using Open Interest in Calls & Put options?

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Open interest in itself will not be sufficient to take a view. You will need to check the change in OI and the direction of the underlying.

For example if the Open interest goes up in NIFTY options at any particular strike and subsequently NIFTY too moves up or down - it indicates that the momentum will continue in that direction or atleast that what the market expects. Like wise when the market is moving continuosly in a particular direction but the open interest comes down - this would mean that the market expects a change in direction.

Hence I suggest you track the change in OI rather than OI itself.

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Typically institutions write/sell options while retail buy options. Based on this info

Suppose Nifty is at 7600

  1. If the open interest of 7700 call option increases means institutions have written this option. Implying institutions are not expecting nifty to go above 7700 and upside is capped at 7700.

  2. Instead if the 7700 call option decreases means institutions have squared off their positions expecting nifty to breach 7700.

Similarly

  1. If the open interest of 7500 put option increases means instituitions are not expecting nifty to go below 7500 and hence have written these options. Thus downside is limited to 7500.

  2. Also instead if open interest of 7500 put option decreases means institutions have squared off their positions and Nifty is likely to go below 7500.

Finally

  1. Nifty mostly will remain within strike prices with maximum open interest. So if 7700 call and 7500 put have maximum open interest for call and put respectively, then this is likely the trading range for nifty.

These are probability based likely scenarios but there are always exceptions like rollover, recent pre-election build up etc.

There is a good article on Z-Connect http://zerodha.com/z-connect/queries/stock-and-fo-queries/basics-on-options-shortingwriting

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Lets say at a particular put strike price OI is increasing and change in OI is also on plus side and price of the scrip goes down …does it mean price will go down further?

I need some clarification…
Let say ITC 170PE premium is changed from 2.05 to 2.40 Rs. in one day …and price has gone down from 202 Rs. to 195.90 Rs. about 6 Rs. Also OI change is plus 774,400

Does it mean institutions don’t expect the price to below 170 Rs. because in your example you said if the put OI increase …it means bullish signal at above that strike?