How to trade using Long and Short information?

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Overview

Instead of diving into the topic I will like to cover basics first. Lets first understand meaning of the terms Long and Short. 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 it is also weekly. 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.

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.

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.

READ  TATA Motors Options Open Interest Analysis Excel Sheet

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.

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.

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.

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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 up.

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.

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.

READ  How to draw Trend lines and use them for Trading?

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

  1. Trend
  2. Interpretation
  3. Open Interest Change
  4. 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

  1. Long Liquidation
  2. Short Buildup
  3. Long Buildup
  4. 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

  1. After downloading you can open the sheet using Microsoft Excel.
  2. 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


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Smithe955

Very energetic blog, I enjoyed that a lot. Perhaps there is a part 2?