Open Interest ultimate confusion

Can anyone tell one thing about Open Interest.
OI is the total no. of outstanding contracts at any point of time.

If I m BUYING 1 lot bank nifty & @nithin is short selling 1 lot banknifty then together we entered into a contract (though not directly but through exchange) then OI becomes = +1.

Tomorrow if nithin squares off his position in LOSS ( :smile: ) & contract is now assigned to someone else . Still OI remains = +1 ?

If there’s an increase in OI, then how does it anticipates a price up or down prediction?

Because suppose a price is increased & OI increases, its bullish sign but OI itself means that as many buyers & as many sellers remain equal.

If OI is increased by 100,000 then 1 lac more contracts are added during an increase in price of share/index.

So 1L open interest addition only means that 1L buyers & 1L sellers have added positions.

So since buyers n sellers remain equal , half of them are bullish & half as bearish. How can it convey anything useful?

Here, I’m giving you the holy grail for open interest. Go crazy.

You do like Nithin a lot right? You tag him in all your posts.

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Certainly he’s the man behind Zerodha & has perfect understanding of the concepts of stock markets especially when it comes to F&O. Last night he beautifully explained about futures calendar spread & cost of carry which brings difference in premium values of all 3 months futures contracts.

Thanks mr srinivas but I have that varisity link. I was looking for a simple answer. I wasn’t able to understand the concept there.

The buying quantity and selling quantity match but this does not imply that the number of buyers and number of sellers are the same.

Quoting from Varsity: “Unlike volumes, the change in Open interest does not really convey any directional view on markets. However it does give a sense of strength between bullish and bearish positions. The following tables summarizes the trader’s perspective with respect to changes in the OI and prices –”


Yes I have gone through all that already but only to end up more confused.

Tracking OI on options is a better idea than futures.

The idea is that option writers are the smarter lot. People who write options are putting up more money vs the one who buys. So this entire OI logic is saying be on the side of the option writer. So if OI on calls is going up, means option writers are coming in to write calls, so expect markets to not go up.

When it comes to futures, when price goes up with reduction in OI, this means that existing shorts are in a hurry to cover their losses. Which could be the possible reason why price is going up. Whenever the short covering ends, it may stop. But when market goes up with OI increase, this means this up move is not because of short covering. So this could possibly continue to move up for longer.

But yeah, all of this doesn’t really make sense all the time


Thanks Mr Nithin, very well said. Though I was fully aware about OI on options part & the significance. Completely agree with regards to options.
Regarding OI associated with futures, you have cleared up my doubts. I am convinced.

Thanks :+1: