Open Interest for Nifty indicates Negative sentiment

14 March 2022 • Parikshit Singh

Open Interest basically indicates the total number of futures and options’ open contracts in the market. The volume of the contracts indicates the number of people currently betting on the direction of the underlying, in this case the NIFTY 50.

Higher volumes indicate a larger bet on the index, the open interest is supposed to be assessed in relation to the price movements.

Today’s OI put/call ratio is 1.07. As the ratio is greater than 1, we can see that there are higher longs in puts compared to calls. Hence, market participants are expecting the index to fall further. Traders can bet accordingly with appropriate stops.

As far as the volumes are concerned, they demonstrate a put to call ratio of 0.80.

A put to call ratio of over 1.3 shows extreme pessimism while a ratio below 0.7 shows extreme optimism on D-Street. This means that traders should go short if the ratio crosses 1.3 and should go long if the ratio is below 0.7.

During a rising market and with the price and volume of open interest rising, usual trend indicates that the momentum is rising, supported by volume. With the price rising and falling volumes, one can expect a peak nearing and may see a reversal in the trend.

The same is applicable during a falling market too.

The crux of the concept revolves around the fact that the price intensity and volume should be used to confirm the strength of the movement wherein the trader can accordingly follow the momentum or bet on a trend reversal.

Hal Clyde Denison Insights reflect the opinions of only the authors who are associated persons of Hal Clyde Denison Limited and do not reflect the views of Hal Clyde Denison Limited or any of its subsidiaries or affiliates. They are for informational purposes only, and are not a recommendation of an investment strategy or to buy or sell any security, digital asset (cryptocurrency, etc) in any account. They are also not research reports and are not intended to serve as the basis for any investment decision.

All investments involve risk including the loss of principal and past performance does not guarantee future results.