Options Open Interest, a handy indicator for intraday options trading: Shubham Agarwal

Shubham Agarwal

Intraday trading of options is favorable due to the relatively minor influence of time-related premium depreciation. However, determining the appropriate assets and timing for trading remains an uncertain aspect. Both of these inquiries can be resolved through an analysis of Options Open Interest (OI).

What is OI?

OI refers to the number of contracts open. Unlike shares where the total number of shares is known, Options contracts can be created without any such physical referencing. Put plainly, whenever a fresh buyer and seller join forces to execute a trade, it results in the formation of an Open Interest (OI) of 1 contract.

What is the Significance of Options (Sellers) OI?

Yes, Options OI is created with the help of both Buyer and Seller. However, we all know Options are like Insurance policies. Here too a buyer will pay a premium for some event happening (Call buyer will want the event of a big bullish move). If that does not happen the premium will turn to "0".

Indeed, Options Open Interest (OI) arises through the collaboration of both purchasers and sellers. Nevertheless, it's widely acknowledged that options bear resemblance to insurance policies. In this context as well, a buyer pays a premium in anticipation of a specific event occurring (for instance, a Call buyer anticipates a big bullish move). Should that eventuality fail to materialize, the premium value will dwindle to zero.

Extending this a bit further, insurance policies can not exist without insurance companies. Just like that Options OI has Option Sellers as a more important counterpart than Buyers. Since Option Sellers are taking unlimited (better put Unknown) risk to get a small premium, they are expected to have a better grip on the underlying stock or index’s expected movement.

Mixing the OI + Significance, we can say that the Strike that has Maximum OI, means that it has a lot of Option Sellers. More Sellers = Stronger players believe in the trade they have taken.

How do we follow Highest OI Strike Trade?

Call Option Seller’s View = Stock / Index should not go above the Strike Price (Opposite of Buyer’s view)

Put Option Seller’s View = Stock / Index should not go below the Strike Price

Now, that said we can also say that Highest OI Call Strike = Strong Hurdle on the Upside as most Option Sellers are of the opinion (Generally this strike is higher than current market price).

Similarly, Highest Put OI = Strong Hurdle on the Downside

We can use this as an input for our Positional trading.

How to use the Highest OI Strike data for Intraday Trading?

We can compare these hurdles as flood gates holding the flow of price. We all know what happens if the floodgates are broken.

Empirically, whenever such Highest Call OI (which is above the current price) or Highest Put OI (which is below the current price) is crossed, there is momentum. This is because many strong players are proven wrong by the market. This will lead to chaos and chaos will lead to momentum.

What is the Trade Setup?

As soon as the Highest Call OI strike is crossed, Buy the Call with a stop loss a few points below Strike Price. Similarly, as the Highest Put OI strike is crossed, Buy the Put with a stop loss a few points above the Strike Price.

I have experienced that more than half of the time, the trades conclude with a profit, and when combined with the assistance of momentum in successful trades, this arrangement has the potential to yield satisfactory returns over an extended duration.Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.