Overview
Instead of diving into the topic I will like to cover basics first. Lets first understand meaning of the terms Long and Short. Proper understanding of these topics are very important for Options trading. You can say that these are foundation principles and you will hear these terms and terminologies while dealing with Options trading. So it is better to have good understanding and grasp of these terms.
After initial discussion on these terms I will also be sharing Open Interest analysis excel sheet which analysis the open interest data and provide useful meaning as well. Note You can also download Open Interest analysis excel sheet to make most of out of the chapter. The link is provided at the end of the chapter.You can download the file for free and use it for your trading.
Open Interest
You have to Buy and Sell Futures and Options Monthly. For bank Nifty and Nifty it is also weekly. Barring the indices for stocks you have monthly expires. When a person buys a derivative then but not sell it then the open interest is 1. The term open interest signifies number of derivative contracts open in market.
A contract is open if it is Bought only or Sold only. That is you have Bought a contract but have not sold it. You can also sell a contract but not buy it. In both conditions contract is open and open interest increases.The contract is closed if it is bought and sold both. So open interest at a time shows number of contracts open or sold at a period of time.
So if Open Interest for any strike price is 100 that means the number of open contracts for that position is 100. It does not signify whether the contracts is Buy or Sold. Now if the open interest increases for a strike price it means people have either bought or sold more of that strike price contracts. If the open interest decreases means people have either closed their position. It means if earlier people have bought it then they have sold it now or if they have sold it previously then they have bought it now.
What is Long?
Long or long position is bullish. It means person is expecting the stock prices to go higher. So they are buying the stock first with a view to sell it later. Long can be used loosely same as buying expecting the prices to go up in positive direction. Many a times in Options strategy you will see the term Long been used instead of Buy for example Long Call is very common terms used for buying Call option.
What is Short?
Short position is bearish. It means person is expecting the stock price to go lower. So they sell the stock first with a view to buy it later. Short can be used loosely same as selling expecting the prices to move down in negative direction. In Options world the term Short is often used as opposite of Long. You will hear terms like Short Call means selling the Call which is opposite of buying the call means person is bearish on market.
Understanding Long and Short Positions
For Long position People buy at low price and sell at high price to make profit. The concept is same for Short as well. People are selling at high price and will buy at lower price. The sell action and buy action occurs at different points. This is the only difference.
For Short sell occurs at first high price and Buy occurs last at low price. The Sell occurs first and then Buy. For Long Buy occurs first at low price and Sell occurs last at high price. The Buy occurs first and sell occurs.
Understanding this basic difference is key to next part of article.
Long Buildup
Long buildup means more people are expecting the prices to go up and creating Long positions. You can simply look at Price and Open Interest to get an idea. If the price and Open Interest goes up then it is Long buildup.
This signifies more traders are expecting the prices to go up. So if for a strike price open interest is increasing and stock prices are also moving up then it is said that long positions are being created. So increase in open interest with price increase can be taken as positive signal.
Short Buildup
Short buildup means more people are expecting the prices to go down and creating Short positions. You can simply look at Price and Open Interest to get an idea. If the price goes down and Open Interest goes up then it is Short buildup.
This signifies more traders are expecting the prices to go down. So if for strike price open interest is increasing and stock prices is going down then it is said that short is building and people are feeling that prices will go down further.
Long Liquidation/ Long Unwinding
Futures and Options are one month affair as mentioned above.The concept remains the same. People who have Long positions will have to sell the positions.
The open interest will decrease if Long positions are sold off. The price will decrease and Open interest will also decrease. This signifies Long Liquidation or Long unwinding.
Note Long Unwinding causes the prices to go down. You can visualize it like if prices are going up then people are booking profit causing open interest to go down. This signifies that stock may move down in following days as bullish view people are booking profit and this may cause the stock price to go down.
Short Covering
If you understood concept of Long Liquidation then it is similar to above one. People having short position will have to Buy the positions. The open interest will decrease if the short positions are covered. The price will increase and open interest will decrease. This signifies Short covering.
Note short covering causes the prices to go up. You can think it as people who were bearish on the stock or who sold it first without having it are now buying it. This will create a demand for the stock and it will move up. Short covering causes good movement in stock prices and often people ride it for good use. The heavier the open interest or short positions created the bigger the positive direction move is.
Conclusion
You can use above interpretation with Nifty Open Interest graph to decide whether to Buy Call option or Put option.The Long Buildup and Short Covering at a particular price shows price will go up. In this case you can buy the call option.The Long liquidation and short buildup shows the price will go down. In this case you can buy the Put option.Not this is the strategy looking at the Open Interest. You should combine this with Global market condition and Technical to make it loss proof.
How to use Open Interest Analysis Excel Sheet
I have provided link to Open Interest Analysis sheet for Nifty, Bank Nifty and All F&O (Futures and Options stock). The excel sheet downloads Nifty Open Interest data and presents in beautiful graphs on basis of which you can easily make your trading decision. The sheet is free to download and use.
Note : The sheet automatically downloads the latest Open Interest data. So you get current information on the sheet all the time. There is no action from your side or need to refer other websites for latest information.
The sheet has all the data you see on Open Interest page of Nifty on NSE. Along with that it has below fields for Calls and Puts to make your analysis easy
- Trend
- Interpretation
- Open Interest Change
- Price Change
Trend
Trend field has values Bullish and bearish depending upon Open Interest changes in market. So in a glance it gives you idea about direction people are thinking.
Interpretation
Interpretation field has 4 values
- Long Liquidation
- Short Buildup
- Long Buildup
- Short Covering
Above we have discussed these terms and what they mean. Now you will be more familiar with them and can use them for your analysis and trading. Note these four terms are very critical for understanding of market movement based on OI that is open interest. You need to interpret these signals and understand it to formulate or predict the direction of stock or index price movement. It will help you make trade in options post interpretation of the data. The sheet takes latest data and provides you signal and above interpretation for easy understanding of yours.
Note
- After downloading you can open the sheet using Microsoft Excel.
- You may see message as SECURITY WARNING : External data connections have been disabled.
3.Click on Enable Content and sheet will get updated with Latest data from Nifty Open Interest.
Click for all F&O stock Options Open Interest Excel Sheet download