What is open interest in an option chain?

Options look simple until the option chain starts throwing numbers at you. Open interest in option chains is one of those numbers that the traders often see but rarely understand fully.

In the option chain, open interest shows the number of option contracts currently open, not traded or closed. It helps the traders to measure participation, liquidity, and where the traders are positioning their bets.

Since the price moves alone can be misleading. Open interest adds context to it by showing that missing layer by showing trader participation, market depth, and positioning. It helps the traders to judge trend strength, identify pressure zones, and understand the market intent.

This blog guides through ‘What is open interest in an option chain?’, how it works, how to read it, and how to use it practically in real trades.

Understanding Option Chain Basics

An option chain is a table or matrix that shows all the available call and put options for a security, which is organised based on the strike price, with columns detailing data such as premium or price, volume, open interest, and expiration dates. It helps the traders to analyse market sentiment, liquidity, and trading opportunities.

The option chain is split into two parts: the left detailing calls and right to buy sections, and the right detailing puts, right to sell sections, with the strike prices in the middle, which allows quick comparison of contracts for making strategic decisions. 

What is Open Interest (OI)? Definition & Meaning

Open Interest (OI) is the total outstanding futures or options contracts that are open and not yet settled in a market at any given point in time. It indicates the total number of positions that haven’t been closed, exercised, or expired, which reflects market liquidity, strength, and commitment to a trend, rather than the daily trading volume. It increases when new buyers and sellers enter the market and decreases when existing positions are closed. 

What is Open Interest in an Option Chain?

Open Interest (OI), in an option chain, is the total number of active, outstanding option contracts, whether it is calls or puts, for a particular strike price that has not been closed, exercised, or expired at a given point in time, showing market depth, liquidity, and interest. It is an indicator of money flow, as a rising OI means new money is entering, while a falling OI suggests that the positions are being closed, which helps the traders to measure market sentiment and identify potential support-resistance levels.

How Open Interest Works in Options

• New contracts: When both the buyer and seller create fresh positions in the same contract, the open interest goes up by one.
• Closing a contract: When an existing position is squared off, that is, if the buyer sells or the seller buys back, the open interest drops by one.
• Net change: The daily open interest reflects the balance of new and closed contracts. For example, if 100 contracts open and 50 close, open interest rises by 50.

Why Open Interest Matters for Traders & Investors

• Measures market commitment: The open interest shows how much of the capital is actually at risk. Unlike volume, it reflects the positions held, which help the traders to judge whether participation is real or just short-term noise.
• Indicates liquidity: A higher open interest indicates tighter bid-ask spreads, which makes the entries and exits smoother, especially for the active traders who need quick fills without much price impact.
• Confirms price trends: When the price and the open interest rise together, the move is said to have support. But if the price falls while the open interest rises, it points to new selling and a trend with strength.
• Signals trend weakness or reversal: The rising prices with falling open interest hint at short covering, not fresh buying. The falling prices with declining open interest suggest that the traders are exiting, often near trend exhaustion.

How to Use Open Interest with Volume & Price Action

Open interest works better when it is read alongside volume and price action, not in isolation. The price action shows direction, while the volume shows activity, and the open interest shows commitment behind the move.

• Track Where Traders Are Committing: The traders should watch how the price moves with open interest. The rising price with rising OI suggests traders are adding positions, while the falling OI shows they are booking profits or stepping out.
• Use OI to Trust Breakouts: When the traders see the price breaking through the key levels, they should check volume and open interest. The rising OI confirms other traders are backing the move, making it more reliable.
• Spot When Traders Lose Conviction: If the price makes new highs but the open interest falls, the traders are not adding fresh positions. This often warns them to tighten stops or avoid chasing the move.
• Read Option Chain Positioning: The traders should study strike-wise open interest. If the Put OI is heavy below the price signals where traders expect support, while the Call OI is heavy above the price, it is likely to mark resistance zones.

Example: Reading an Option Chain (with open interest)

How to read an Option chain with open interest?

• Find the Active Price Zone: The traders usually begin by locating the At-The-Money (ATM) strike, where the option price is closest to the current market level, and activity is highest.
• Mark Resistance from Calls: Then the traders look for strikes with heavy Call open interest, as these levels usually act as resistance where the upside moves may slow down or pause.
• Spot Support from Puts: The high put open interest helps the traders to identify support zones, by showing where the downside is expected to hold, and buying interest may emerge.
• Check Where Trading Is Busy: The traders compare open interest with volume to see where the fresh positions are being added, not just traded and closed.
• Read Market Bias with PCR: The traders use the Put-Call Ratio near the ATM strike to measure sentiment, whether the market is leaning bullish, bearish, or neutral.

Let’s understand with an example!

Let’s assume that the Nifty is trading at 23,300, which makes 23,300 the At-The-Money (ATM) strike. It means it is closest to the current market price and has the most activity. At this level, both the call and put options have reasonable prices and open interest, showing many traders are involved.

Now looking above the price. At the 23,500 strike, Call open interest is highest at 150,000 contracts. It tells that many traders believe that the Nifty may struggle to move above this level, so it acts as resistance. Below the price, the 23,000 strike shows high Put open interest at 120,000 contracts, indicating the traders expect it might support there. The Put-Call Ratio near ATM is 0.875, favouring calls, which hints at mild bearish pressure. Overall, this suggests Nifty may trade between 23,000 and 23,500 rather than make a sharp move.

Limitations & What OI Doesn’t Tell You

• Not a Direction Signal: The traders should remember that open interest shows activity, not direction. Without price action and volume, OI can easily lead to wrong conclusions.
• No Insight into Trader Intent: The traders can’t figure out whether the positions are for hedging, speculation, or arbitrage. OI hides the motive and strength of the participants involved.
• Can Be Misleading Around Events: The traders usually see unusual OI spikes around expiry or rollovers. These moves may look important, but don’t always reflect real buying or selling interest.
• Lags and Misses Conviction: The traders should note that OI is cumulative and slightly delayed. It doesn’t show immediate sentiment or how confident the participants are in a move.

Practical Steps: How to Use Open Interest in Your Trading Strategy

• Track OI with Price and Volume: The traders should monitor daily open interest changes alongside the price and volume to understand whether the positions are building or unwinding.
• Confirm Trend Strength: The rising price or falling price with increasing volume and OI shows strong participation and a trend backed by fresh positions.
• Watch for Fading Moves: If the price moves but both the volume and OI fall, the traders might expect a weakening momentum or possible trend exhaustion.
• Identify Reversal: When the price rises but the open interest drops, the traders might treat this move as a short covering, not fresh buying.
• Mark Key Levels: A high open interest at specific strikes helps the traders to identify support and resistance zones in advance.
• Use OI with Other Tools: The traders should combine open interest with indicators such as VWAP, moving averages, and price action for better decisions.

Conclusion

Open interest is more than just another number in the option chain. It shows where the traders are committed, how much participation exists, and whether the price moves have real backing. When it is read with the price action and volume, it helps the traders to judge trend strength, identify pressure zones, and avoid weak signals.

However, open interest works better as a supporting tool, and not a standalone indicator. When used correctly, it can add clarity to option chain analysis, helping the traders to make more informed, structured trading decisions instead of reacting blindly to price moves.

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