You have heard of Open Interest. But do you know how exactly to use Open Interest? Today I will show you how to do Nifty open interest data analysis. You can also taker successful Nifty trades after you learn this technique.
Now what is an Open Interest?
If a trader buys one contract of Nifty and does not sell it before day end its called increase of 1 open interest on the buy side. Similarly when a trader sells one contract of Nifty and does not buy it before day end its called increase of 1 open interest on the short side.
Options are not like futures. In options generally smart traders are option sellers who make money selling options and eating the time value. So in options generally increase of open interest denotes short build up on the options. So if you see sudden spike of open interest on a call option you can understand traders are selling that srike price calls and that zone will be resistance. Similarly if you see sudden spike of open interest on a put option you can understand traders are selling that srike price puts and that zone will be support.
Now how exactly to do Nifty open interest data analysis?
Visit this page in my site, Nifty Open Interest. There you can notice 2 charts. First chart shows current Nifty options open interest position and second chart shows open interest increase or decrease in a specific strike price.
Now, watch the first chart carefully. This chart is an updated chart of Nifty open interest. We can see that highest open interest bar is at 8000 put option. So its obvious that 8000 is the strongest support. We are also seeing highest open interest bar of the calls are at 8400. So 8400 is the immediate resistance. Also notice that calls OI bars are much smaller than the put OI bars. So it denotes that supports are more stronger than resistances.
How to trade using Nifty open interest data analysis?
As we see that the supports are more stronger we will not short the market on rallies, rather we will try to buy in dips. Also as 8400 is the immediate resistance we will try to take profit close to 8400. In my next post I will discuss how to interprete increase and decrease in open interest.