Open Interest in Options Trading

What is Open Interest (OI)?

In the spot market, once a buyer and a seller execute a transaction, the trade is settled, and the contract ends. If the trade doesn’t go through during the session, it’s simply cancelled and needs to be reinitiated the next day.

However, the derivatives market operates differently. When you purchase an option on m.Stock, the transaction remains open until either you sell it (square off your position) or the contract expires. This ongoing position is referred to as Open Interest or OI.

Every time a new option contract is created, a buy matched with a corresponding sell, it adds one unit to Open Interest. These contracts remain in OI until they are squared off or expire.

Open Interest vs Volume: Not the Same

While OI and volume may seem interchangeable, they measure different things:

For example, volume resets daily, but OI accumulates over sessions, helping traders track the persistence and strength of market trends.

What Open Interest Tells You

Open Interest is a vital tool for understanding market sentiment and liquidity. Here's how it works:

• Increasing OI suggests growing participation. More traders are entering positions, reinforcing the current market trend.
• Decreasing OI indicates that participants are exiting their positions, which could signal trend exhaustion or a potential reversal.

That said, a rise in OI doesn’t automatically mean bullishness or bearishness. For instance:

• Rising OI + Rising Price → Often seen as bullish
• Rising OI + Falling Price → Often seen as bearish
• Falling OI + Any Price Movement → Could indicate unwinding or profit booking

Real Example: Reliance Industries Open Interest Snapshot

Notice how OI drops significantly on expiry day (28-Jul). Even though many contracts lapse (often worthless), they still reflect in the OI unless actively squared off.

What is MWPL and the Ban Period?

Market Wide Position Limit (MWPL) is the cap set by exchanges on the total number of open derivative contracts for any stock. It represents the maximum allowable Open Interest across futures and options.

Ban Rule:

• If a stock’s OI crosses 95% of MWPL, the exchange bans fresh F&O positions in that stock.
• Only existing positions can be squared off, no new positions can be initiated.
• The ban is lifted once OI falls below 80% of MWPL.

This system helps curb excessive speculation and maintain market stability.

Exchanges also impose participant-wise limits to control total open positions by a single client, foreign portfolio investors (FPIs), or mutual funds.

How Traders Use Open Interest

• Traders track OI concentration at specific strike prices to determine support and resistance levels.
  • High put OI → Likely support zone
  • High call OI → Likely resistance zone
• Sudden shifts in OI alongside price movement can signal:
  • Breakouts
  • Reversals
  • Short covering or profit booking

However, these signals should be validated with other indicators before acting on them.

Liquidity and OI: A Key Consideration

Before entering any options trade on m.Stock, review the OI data for that contract. High OI typically indicates:

• Better liquidity
• Tighter bid-ask spreads
• Easier entry and exit

Options with thin OI may suffer from low volume and wider spreads, making them inefficient for trading.

Things to Remember

• Open Interest (OI) represents all active, unsettled derivative contracts.
• One buy + one sell = one Open Interest unit.
• Volume measures daily trading activity, including both new and closed contracts.
• OI continues from session to session; volume resets to zero daily.
• Rising OI suggests stronger conviction in the current trend; falling OI may signal loss of interest.
• Check OI before placing a trade to gauge liquidity and market depth.

Stocks exceeding 95% of MWPL enter a ban period, restricting new F&O positions.