The open interest in options is a bit different in its interpretation part just because the inherent nature of the option instruments in terms of time decay and volatility cool off puts option sellers at an advantage if they have big enough capital to play with and take advantage of these factors to their side.
While in futures we have to be in the guessing game of whether longs/shorts are active in the instrument but when it comes to options the default presumption is that any OI addition is by an option writer and that is the main reason for change in the interpretation logic as presented below
Open interest addition in Puts – Bullish for the market.
Open interest addition in calls – Bearish for the market.
Open interest reduction in Puts – Bearish for the market.
Open interest reduction in Calls – Bullish for the market.
However it is pertinent to note that there are times when option writers are not willing sell options and you have to see the interpretation differently during those times where big institutions are not willing to write options (Check our DeCode OI section to understand more about how to know when big institutions are not interested in option writing)
During these times one has to follow the conceptual interpretation logic(below) rather than the one above.
Call Price increasing + Call OI Increasing = Call Long Buildup – Bullish indication.
Call Price decreasing + Call OI Increasing = Call Short Buildup – Bearish indication.
Put Price increasing + Put OI increasing = Put Long Buildup – Bearish indication.
Put Price decreasing + Put OI Increasing = Put Short Buildup – Bullish indication.
Call Price increasing + Call OI decreasing = Call Shorts exiting – Bullish indication.
Call price decreasing + Call OI decreasing = Call longs exiting – Bearish Indication.
Put Price increasing + Put OI reducing = Put Shorts exiting – Bearish indication.
Put Price decreasing + Put OI reducing = Put longs exiting – bullish indication for the market.
It is really important that one has to be aware of the current market scenario and use one of the interpretation logics mentioned above to understand the open interest activity in options.
Looks difficult worry not we have built both the logics above into our Δ OI feature so that you don’t have the hassle of interpretation and you can easily understand what is happening just by looking the “Action” column within out Δ OI tables.
Have thoughts to share or questions to ask? Feel free to comment below