What is an Open Interest in Futures and Options? 

In India, futures and options (F&O) trading has grown significantly over the last decade. According to NSE data, derivatives volumes have touched record highs in 2025, making India one of the world’s largest derivatives markets. For a trader, understanding the key metrics that drive this segment is crucial. Among these, open interest stands out as a vital measure that can help you interpret market sentiment, liquidity, and the strength of ongoing trends.

This blog explores what open interest means in futures and options, how it is calculated, why it matters, and how you can interpret it for better trading decisions. 

Understanding the Concept of Open Interest 

Open interest represents the total number of futures and options contracts that are still active and unsettled at the close of a trading day. These contracts are neither squared off nor allowed to expire. Simply put, open interest tells you how many contracts are still “open” in the market.

Every futures or options trade has two sides: a buyer and a seller. A new contract is created only when both parties open a fresh position. Similarly, open interest falls when contracts are closed, either through squaring off or by expiry.

For example:

• If you buy one Nifty futures contract and another trader sells it to you, open interest increases by one.
• If you later close this position by selling it to someone else, open interest reduces accordingly.

Open interest is not about the number of buyers or sellers but about the number of active contracts. Higher open interest generally indicates more liquidity and market participation, while falling open interest suggests that traders are closing out positions.

How is Open Interest Calculated in Futures & Options? 

The calculation of open interest is straightforward. Exchanges like the NSE and BSE update open interest figures daily after market close.

Here is how it works step by step:

1. New Position Opened:
   • Trader A buys one Bank Nifty futures contract.
   • Trader B sells that contract for the first time.
   • Open interest increases by one.
2. Transfer of Position:
   • Trader A sells the same contract to Trader C.
   • Trader B remains the counterparty.
   • Open interest does not change, as no new contract is created or closed.
3. Closing a Position:
   • If Trader A sells to Trader B to square off his position, that contract is closed.
   • Open interest decreases by one.

The total open interest for a contract is the net number of contracts that remain unsettled at the end of the trading day.

Exchanges provide this data under the “derivatives” section. You can easily view it through the NSE option chain for indices like Nifty and Bank Nifty, as well as for stock derivatives.

Difference Between Open Interest and Volume 

Many traders confuse open interest with trading volume, but they are different measures.

Example:
If 5,000 Nifty call options were traded in a day, that’s the volume. But if 2,000 of these remain active at day-end, the open interest is 2,000.

Thus, volume measures activity in a specific time frame, while open interest measures positions that remain active.

Why Open Interest Matters in F&O Trading? 

For a trader, open interest provides insights that simple price charts cannot. Here are the key reasons it matters:

1. Indicator of Market Participation 

   
   A rise in open interest signals that new positions are being created. This shows active participation and confidence in a particular strike or contract.

2. Liquidity Measurement 

   
   Contracts with higher open interest tend to have tighter bid-ask spreads. This makes it easier for you to enter or exit positions without a large price impact.

3. Confirmation of Trends 

   • Rising prices along with rising open interest indicate fresh buying, supporting a bullish trend.
   • Falling prices with rising open interest indicate short build-up, supporting a bearish trend.

4. Early Warning of Reversals 

   
   If open interest stagnates or falls while prices keep rising, it may indicate that the rally is losing steam.

5. Risk Management 

   
   By studying open interest shifts, you can avoid trading illiquid contracts and better gauge where institutional money is flowing.

Also Read: https://www.mstock.com/articles/bull-vs-bear-market 

Interpreting Open Interest Data in Futures & Options 

Interpreting open interest correctly is essential. Here are the most common scenarios:

1. Rising Price + Rising OI → Strong bullish trend (long build-up).
2. Falling Price + Rising OI → Strong bearish trend (short build-up).
3. Rising Price + Falling OI → Short covering rally (temporary up move).
4. Falling Price + Falling OI → Long unwinding (weakening downtrend).

This analysis becomes even more powerful when combined with trading volume and price action. For example, if Nifty futures see rising prices, higher open interest, and strong volume, it usually confirms institutional participation in the uptrend.

Open Interest in Options Trading 

In options trading, open interest plays an important role in analysing the option chain.

• Call Options: Rising OI at a strike price often signals resistance, as sellers are writing contracts expecting the market to stay below that level.
• Put Options: Rising OI at a strike price signals support, as sellers expect the market not to fall below that level.

This is why traders look at the PCR (Put-Call Ratio), calculated as:

PCR = Total Put OI/Total Call OI

• PCR greater than 1 → A higher volume of put options compared to call options, usually reflecting a bearish market sentiment.
• PCR less than 1 → A higher volume of call options compared to put options, generally signalling a bullish market outlook.

In India, the Nifty and Bank Nifty option chains are widely used by traders for intraday and positional trading strategies. High OI concentrations at particular strikes often act as psychological support and resistance zones.

Practical Example of Open Interest in Futures and Options 

Let’s take an example from the Nifty 50 derivatives segment.

• Suppose the Nifty 50 is trading at ₹22,500.
• In the option chain, the 22,500 call option shows open interest of 1.2 lakh contracts.
• The 22,500 put option shows open interest of 1.5 lakh contracts.

This indicates that more traders have taken positions expecting Nifty to remain above 22,500 (since puts are being written). Hence, 22,500 is acting as strong support.

On the other hand, if the 23,000 call option shows open interest of 1.8 lakh contracts, it indicates that many participants are betting Nifty will not go above 23,000. This level may act as strong resistance.

In this way, analysing open interest helps you map out probable support and resistance levels in the near term.

Conclusion 

Open interest is one of the most important metrics in futures and options trading. It tells you about liquidity, participation, and the conviction of traders behind price movements. While open interest by itself is not bullish or bearish, combining it with price action and volume gives you valuable insights into market trends.

For a trader in India’s fast-growing derivatives market, tracking open interest regularly through exchange data and option chains can enhance your decision-making, help you manage risk, and improve your trading strategies.

Also Read: https://www.mstock.com/articles/zero-risk-f-and-o-trading-strategies