Why does open interest of index options decreases when price rises above the day open price in index options but open interest doesn’t decrease when price goes below the days low? If options sellers are liquidating after days high is breached then option buyers should also liquidate their positions below days low and hence open interest should decrease? Correct me if my understanding is flawed
Both option buyers and sellers form part of the OI on both sides. If the OI decreases after a large upmove, it is possible that the option sellers are liquidating their call sells and either sitting out or shifting to higher levels. While the option buyers are either buying the same or booking profits on the long side.
While on the downside, if the option sellers believe that the downside is capped, they sell puts and therefore, the OI doesn’t decrease much and the option buyers may buy the same puts with an expectation that the market will fall further.
If the option buyer here is right on the put side, then the puts unwinding happens and therefore, we observe the downfall is generally sharp but happens only for shorter duration as compared to longs.
OI is truly an interpretation based art and takes lot of time to understand it well
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I wasn’t asking about the overall OI of the index options but rather for a particular strike CE or PE.
Suppose price of CE option rises above the day open price of that particular CE option, OI decreases drastically. But when price goes below the days low of that particular CE option, OI doesn’t change noticeably. My argument is that if OI decreases on breaching day high due to call sellers unwinding, then OI should also decrease below days low due to option buyers unwinding