Importance of open interest in trading
The term open interest in trading is defined as the total number of contracts that are still available. Open interest differs from option volume and it is defined as the number of available options within the given duration of time.
Open interest (OI) the to as open orders or open commitments. It is identified as the most popular indicator which well-known to identify as well as confirming the trends. This indicator favours option traders as well as future traders, and it can be used in stock trading as well.
Usually, the trading market discloses open interest on regular by the end of the trading day. On the other hand, it is also represented as the comparison value to the previous day value. So, you can take both positive as well as negative value. In trading, positive values mean that the open interest on one particular day is much higher than that of the previous day; whereas negative value is quite opposite to it.
It’s well known fact that, OI is much better than the call option investor. The reason behind it is, there is more option for liquidity that you are trading. It would be really beneficial if you need to close down all the available options before an expiration of the open interest option.
The bottom line
Open interest is considered to be the strongest indicator when it is used along with the volume and price indicators. The increase in OI and price indicates the presence of a strong upward moving market; whereas the decline in the OI and increase in the cost indicates a weakening of the upward rising market. The decrease in the price, as well as open interest, shows the consolidation of the market movement; whereas the decrease in the Price and increase in the OI indicates the presence of the weak market.
If OI to volume ratio in a stick market is low but significant rise in it, then it indicates future upward movement of the underlying stock price. If the situation occurs in the put option, it indicates the downward cost movement in future.