Understanding Open Interest in Futures Trading

CA Manish Singh: 
Hello everyone, and welcome to Chapter 20. 

In the last video, we understood what to check before going long, what to check before going short, and how different signals influence both long and short setups. You also learnt that there can be many possibilities and probabilities that guide your decision. 

Now we move to a new context. 
Let us say you want to take a bullish trade. For you to buy a Futures contract, someone must be willing to sell it. Only then can the trade happen. 
This is where the concept of Open Interest becomes important. 

What Open Interest Means 

CA Manish Singh: 
Let us first understand the meaning of the word “interest”. 
You are watching this video because you have an interest in trading. 

Similarly, Open Interest refers to the number of contracts that are currently open in the market. 
For every open contract, we need one buyer and one seller. 

To keep it simple, if one buyer and one seller enter a contract because one is interested in buying and the other is interested in selling, that combination becomes one unit of Open Interest. 

Where to See Open Interest 

CA Manish Singh: 
Let me show you where this data appears on the screen. 

This is the same chart we were using in the last chapter. 
If we check the Nifty July Futures contract and click on the quote section, you will again see the same chart with the same markings like the Marubozu and resistance zones. 

Now look below. 

Here you can see the bid and ask prices. 
Someone is ready to buy at this price, and someone is ready to sell at that price. 
All of this is visible here. 

Scroll further down. 

Now you will see Open, High, Low, Volume, and Open Interest. 
Volume tells us how many contracts were traded. 

Open Interest here shows 1 crore 36 thousand 125 contracts (1,36,125). 
Nifty has a lot size of 75. 
So let us divide it. 

1,36,125 divided by 75 gives us approximately 1,825 open contracts. 

This means 1,825 buyers and 1,825 sellers are already part of this trade. 
Their trades are still active, not squared off. 

Everyone with an open position has a view. 
Those who are short believe the market may fall. 
Those who are long believe the market may rise. 

How Buy and Sell Orders Meet 

CA Manish Singh: 
Take an example. 
Suppose I entered 100 points below the current price and I am seeing a 100 point profit. 
My target is 120 points. 
If the market goes 20 points higher from here, I will sell to book profit. 

At the same time, when the market moves up by 20 points, there will also be people interested in buying because they believe a breakout may happen. 

This is how order matching takes place. 

For example, we see 10 orders for a quantity of 1,550 at 25,545. 
This means 10 orders are interested in buying 1,550 quantity at 25,545. 

Similarly, there are 31 orders with 3,675 quantity to sell at 25,555. 

These numbers show interest on both sides. 
That is why at every price level you will always see bid and ask quantities. 

This is the basic idea behind Open Interest. 
Open Interest represents all the contracts that are still active. 
Everyone who has an open position also has a target and a stop loss. 

How Traders Interpret Open Interest 

CA Manish Singh: 
Now let us understand the real use of Open Interest. 
How do traders read it? 
How does it help in judging whether the market can move up or not? 

For now, we will only talk about Futures. 
When we discuss Options later, Open Interest interpretation changes. 

Here is how Open Interest works in Futures. 

Price Going Up and Open Interest Falling 

If price is rising and Open Interest is falling, it means: 

• Traders are buying
• Traders are exiting short positions
• Sellers are not adding new short positions 

This indicates that the bullish trend may continue. 

Price Going Up but Open Interest Not Falling 

If price is going up but Open Interest is not reducing significantly, it means: 

• Traders who were short are not exiting
• There is no clear short covering
• Momentum may slow down
• The market may even reverse if selling pressure remains 

A small change of 1 percent or 2 percent in Open Interest is not significant. 
A meaningful change is around 7 to 10 percent. 

If price goes up by 100 points but Open Interest does not decline, short positions are still intact. This increases the possibility that the market could pull back. 

If traders fear the market could go higher, they will start covering their shorts. 
Short covering is the reason why Open Interest declines while price rises. 

Price Going Up and Open Interest Increasing 

If price is rising and Open Interest is also rising, it means: 

• More traders are shorting at higher prices
• New short positions are entering
• Price may struggle to go higher for long
• A reversal becomes possible 

Price Falling and Open Interest Falling 

If the market is falling and Open Interest is also falling, it means: 

• Traders who were short are booking profit
• Short positions are being squared off
• Price may reverse at any point 

Price Falling but Open Interest Not Changing 

If price is falling and Open Interest does not change: 

• The trend may continue for some time
• There is no major exit from shorts
• No new positions are being added either 

Price Falling and Open Interest Increasing 

If price is falling and Open Interest is rising: 

• More traders are shorting
• The downtrend may continue further
• Selling pressure is strengthening 

Why Open Interest Matters 

CA Manish Singh: 
So this is how we interpret Open Interest. 
A significant change in Open Interest helps you understand possible market direction. 
It also helps you read sentiment among Futures traders. 

In the next chapter we will discuss stock Futures in detail. 
We will cover expiry, contract cycles, and how to manage risk. 
We will also see how stock Futures differ from stock Options. 

Let us meet in the next chapter. 

Disclaimer: Investments in securities markets are subject to market risks. Read all related documents carefully before investing.