Open Interest & Option Chain Analysis

In the world of options trading, two of the most critical analytical tools are Open Interest (OI) and Option Chain Analysis. While price and volume are commonly used indicators, OI and the Option Chain give unique insights into market sentiment, strength of price movements, and likely support/resistance zones.

Let’s break down both concepts thoroughly and understand how you can use them to make smarter trading decisions.

1. What is Open Interest (OI)?
Open Interest (OI) refers to the total number of outstanding (open) option contracts that have not been settled or squared off. These contracts can be either calls or puts, and each open contract reflects a position that has been initiated but not yet closed.

Important: OI is not the same as volume.

Volume counts the number of contracts traded in a day.

OI shows how many contracts are still open and active.

Example:
If Trader A buys 1 lot of Nifty Call and Trader B sells it, OI increases by 1.

If later one of them exits the trade (either buy or sell), OI decreases by 1.

If the same contract is bought and sold multiple times in a day, volume increases, but OI remains the same unless a new position is created or closed.

2. Interpreting Open Interest Changes
Here’s how to interpret changes in OI:

Price Movement OI Movement Interpretation
Price ↑ OI ↑ Long Buildup (bullish)
Price ↓ OI ↑ Short Buildup (bearish)
Price ↑ OI ↓ Short Covering (bullish)
Price ↓ OI ↓ Long Unwinding (bearish)

This table is a cheat sheet for OI interpretation. Let’s break them down with simple language:

Long Buildup: Traders are buying calls/puts expecting further rise. (Positive sentiment)

Short Buildup: Traders are selling expecting fall. (Negative sentiment)

Short Covering: Sellers are closing their shorts due to rising prices. (Momentum shift to bullish)

Long Unwinding: Buyers are exiting as prices fall. (Loss of bullish strength)

3. What is Option Chain?
The Option Chain is a table or listing that shows all the available strike prices for a particular underlying (like Nifty, Bank Nifty, or a stock) along with key data:

Call & Put Options

Strike Prices

Premiums (LTP)

Open Interest (OI)

Change in OI

Volume

Implied Volatility (IV)

Structure of Option Chain
An Option Chain is usually divided into two sides:

Left Side → Call Options

Right Side → Put Options
In the middle, you have the Strike Prices listed.

4. Key Elements in Option Chain Analysis
A. Strike Price
The set price at which the holder can buy (Call) or sell (Put) the asset.

At the Money (ATM): Closest to current spot price

In the Money (ITM): Profitable if exercised

Out of the Money (OTM): Not profitable if exercised now

B. Open Interest (OI)
Shows how many contracts are still open for each strike. Higher OI means greater trader interest.

C. Change in OI
Shows how much OI has increased or decreased. This is critical for real-time sentiment tracking.

Increase in OI + Rising premium = Strength

Increase in OI + Falling premium = Resistance or Support forming

D. Volume
Number of contracts traded today. Shows activity and liquidity.

E. Implied Volatility (IV)
Indicates market expectation of future volatility. High IV means higher premiums.

5. How to Read Option Chain for Support & Resistance
One of the most powerful uses of Option Chain Analysis is identifying short-term support and resistance.

Highest OI on Call Side = Resistance

Highest OI on Put Side = Support

This happens because:

Sellers of Calls don’t want price to rise above their sold strike

Sellers of Puts don’t want price to fall below their sold strike

Example:
Let’s say:

19700 CE has 45 lakh OI

19500 PE has 40 lakh OI

This implies:

Resistance = 19700

Support = 19500
So, traders expect Nifty to remain between 19500–19700.

Conclusion
Open Interest and Option Chain Analysis are powerful tools to understand the mood of the market. They help traders:

Find real-time support and resistance

Gauge market direction and strength

Understand where big players (institutions) are placing their bets

Plan both intraday and positional trades with more accuracy

But remember, OI and Option Chain are not standalone indicators. Combine them with price action, volume, and technical levels for better results.