Open Interest and its impact

Hi All,

As we all know open interest in futures give very good indication of the short term trend of a particular contract. As i know :
1. future price up and OI build up then there is long build up.
2. future price up and OI down then there is unwinding and price may go down ?
3. future price down and OI down then short build up.
4. future price down and OI up then unwinding.

i know very little about this concept. As my underdtanding goes OI and COC(Cost of Carry) has significant impact on trend of underlying contract. Today for example HDIl at 1 O clock in NSE site it was shoeing that OI down by 19%. After some time i saw share value also coming down .. can we interpret this situation as longs booking profit ??

Please all seniours throw some light in to this topic.

Cheers,
Nagendra

prima facie we construe as following-

future price up & OI up: long positions are being created
future price up & OI down: short covering
future price down & OI up: short positions are being created
future price down & OI down:long liquidation

thanks mahesh..

finally one reply...but one thing is for sure from myreadings OI really gives good knowledge about on going trend

personally,for me more than coc or any other thing oi is first priority....oi(eod) primarily gives us an indication where the smart money is and then we intra traders capitalise on it...
i have never had a bad trade in memory where i have considered oi(eod) and chart patterns on intraday--basically i see oi and base my trade according to a chart pattern which is supporting the trend(again through oi).
all the best.
p.s: plz excuse me as i am not a senior.

can u please elaborate a bit more on this

I am not too se about what Adheer must have wanted to say...however, here are my 2 cents on OI & premium/discounts....


For the sake of simplicty, let me first tell what are premium/discount...In a nutshell you can say, it is that number by which The FUT prices differ the Spot/Cash prices....Lets say for example, Nifty Spot is at 2900 and Nifty Fut is at 2920...that means NF are qouting at 20 points in premium...while, if it is 2880, that would mean NF is quoting at a 20 point discount...

generally, in a trading market/range bound market, you wud find NF being quoted in a range of 10-12 points....Premium/Disc purely depends after what trend has market become range bound....mostly after downtrends, u wud find NF in disc and after uptrends, in prem...

On the other hand a prem/disc of 20 points or so in NF tells the market sentiment. Just like someone pointed out, it tells us where probably is the smart money....and it also tells about a strong sentiment in tht direction....

Usually a reversal/change in mood or trend is marked by the disc/prem changing into prem/disc....for ex if mkt sentiment is changin from bearish to bullish, u can very well expect the NF moving from disc to flat or into prem....


However, it must be noted that the prem/disc are very subjective...u cant trade them so simply....at times i have seen markets rising by as much as 250 points and NF disc not even going premium...and vice versa too....Thus, price action assumes most importance, and dese data cud be used to support ur decisions....

I am sorry if i focussed too much on nifty, but thats all I track...and i guess the funda remains same accross the board..

Happy Trading

really nice explanation adheer.. now i clearly understood..

Hai,
Today in UNITECH share 1.12 crore OI was build up around 2.30 PM.From this news how can we deside this share move up or down?

hi nag,

Just saw your post today ....
i posted this some years back in a thread started by karthik or saint ( dont remember) .... hope this helps.

Thank you RD ji,

Nice illustration.