Open Interest Chain Analysis

1. Basics of Open Interest

Open Interest refers to the total number of outstanding derivative contracts (futures or options) that are currently active and not closed or settled. Unlike stock trading, where the number of shares is fixed, derivatives can be created and extinguished through contracts.

If a new buyer and new seller enter a contract → OI increases by 1.

If an existing contract holder closes their position (buy vs sell) → OI decreases by 1.

If an existing position shifts hands (buyer sells to a new buyer) → OI remains unchanged.

Key Points:

OI is reported at the end of the trading day.

OI gives a measure of liquidity and market participation.

Higher OI means greater trader interest and tighter spreads.

2. Difference Between Open Interest and Volume

Many beginners confuse volume with open interest.

Volume: Number of contracts traded during the day (can include multiple trades of the same contract).

Open Interest: Number of outstanding contracts still open at the end of the day.

Example:

Trader A buys 1 lot of Nifty call option from Trader B.

Volume = 1

OI = 1 (new contract created)

If Trader A sells that contract to Trader C:

Volume = 2 (two trades happened)

OI = 1 (still one open contract, just transferred)

So, volume measures activity, while OI measures positions outstanding.

3. Mechanics of Open Interest Creation and Reduction

Understanding how OI increases or decreases helps in interpreting market activity:

New Buyer + New Seller → OI Increases.

Old Buyer + Old Seller Square Off → OI Decreases.

Old Position transferred (buyer sells to new buyer) → OI unchanged.

This is why OI analysis is powerful—it helps in distinguishing between fresh positions and unwinding.

4. Importance of OI in Options and Futures

Open Interest matters because:

It reflects market participation (are traders interested?).

Identifies support/resistance levels (through strike-wise OI).

Highlights trend confirmation or rejection.

Reveals institutional footprints (big money creates large OI).

Useful for strategy adjustments (hedging, spreads, straddles).

5. Open Interest Chain (OI Chain) Explained

An OI Chain is essentially a table of strike-wise option contracts, displaying:

Strike Price

Call OI (with changes)

Put OI (with changes)

Volume

Last Traded Price (LTP)

By analyzing this chain, traders can:

Spot which strikes have maximum call OI (resistance).

Spot which strikes have maximum put OI (support).

Track shift in OI to see if market is building bullish or bearish sentiment.

6. Techniques of OI Chain Analysis
A. Call vs Put OI Analysis

High Call OI at a strike → resistance level.

High Put OI at a strike → support level.

If Call OI increases and price falls → bearish confirmation.

If Put OI increases and price rises → bullish confirmation.

B. Change in OI (Intraday vs Daily)

Rising OI + Rising Price = Long Build-up (Bullish).

Rising OI + Falling Price = Short Build-up (Bearish).

Falling OI + Rising Price = Short Covering (Bullish).

Falling OI + Falling Price = Long Unwinding (Bearish).

C. Put-Call Ratio (PCR)

PCR = Total Put OI ÷ Total Call OI.

PCR > 1 = more puts than calls → bullish sentiment.

PCR < 1 = more calls than puts → bearish sentiment.

Extreme PCR values indicate overbought/oversold conditions.

D. OI Concentration Zones

Maximum Call OI → major resistance.

Maximum Put OI → major support.

These act like psychological barriers where option writers defend positions.

7. Bullish, Bearish, and Neutral Interpretations
Bullish Signs:

Put OI increasing at higher strikes.

Call OI unwinding.

PCR rising above 1.

Long build-up observed in futures.

Bearish Signs:

Call OI increasing at lower strikes.

Put OI unwinding.

PCR falling below 1.

Short build-up in futures.

Neutral/Range-Bound:

Balanced OI between calls and puts.

High OI at both nearest call and put strikes → “straddle zone.”

PCR around 1.

8. Combining OI with Price Action and Volume

Open Interest Chain Analysis is powerful only when combined with price and volume.

Price Up + OI Up + Volume Up → Strong bullish momentum.

Price Down + OI Up + Volume Up → Strong bearish momentum.

Price Sideways + OI Up → Range formation.

Price Up + OI Down → Short covering rally.

Thus, OI confirms whether a price move is genuine or just short-term volatility.

9. Institutional vs Retail Perspective

Institutions (FIIs, DIIs) often write options (sell calls/puts) to collect premium, leading to high OI concentrations.

Retail traders usually buy options, creating temporary OI spikes but often losing to time decay.

Hence, smart traders watch where institutions build OI—those levels become critical.

10. Limitations and Misinterpretations

Lagging Indicator – OI data is end-of-day in many markets.

False Signals – OI can rise due to hedging, not directional bets.

Expiry Week Noise – OI shifts rapidly as contracts near expiry.

Market Structure Differences – In US, OI behaves differently due to weekly expiries vs Indian markets.

Not Standalone – Should be used with price, volume, and broader trend.

11. Practical Case Studies
Case Study 1: Bullish Setup

Nifty at 20,000.

Max Put OI at 19,800, Max Call OI at 20,200.

PCR = 1.2.

Price rising with Put OI addition.
👉 Interpretation: Support strong at 19,800, resistance at 20,200. Bullish bias.

Case Study 2: Bearish Setup

Bank Nifty at 45,000.

Call OI rising at 45,500, Put OI unwinding at 44,800.

Futures showing short build-up.
👉 Interpretation: Resistance building overhead, downside likely.

Case Study 3: Range-Bound Setup

Stock XYZ trading at ₹1000.

Equal OI at 980 Puts and 1020 Calls.

PCR = 1.
👉 Interpretation: Market makers expect sideways movement, straddle possible.

12. Conclusion

Open Interest Chain Analysis is a window into the psychology of derivative markets. It reveals where big players are positioning, what levels they defend, and whether price action has strength behind it.

Key Takeaways:

OI measures open contracts, not trading volume.

Call OI = Resistance, Put OI = Support.

Change in OI + Price helps identify long/short build-ups.

PCR gives overall sentiment.

Best used with price action and volume.

A disciplined trader does not rely solely on OI but combines it with technical analysis, market structure, and macro events to refine decisions. With practice, OI Chain Analysis becomes a powerful tool for forecasting and risk management.