I have been reading about ‘Open Interest’ all day today and so far i have understood that it can act as a guide as to which way the Markets are likely to move based on probabilities.
Price Action also plays a very important role in terms of how to interpret what the O.I is telling you.
I have also understood(correct me if i am wrong) that Call Writers make money by eating the premium and can be termed as Bears where as Put Writers do the same(when it comes to premium) but are seen as Bulls.The reason for Call Writers being termed as Bears is because they don’t expect the Indices or stock to cross that strike price and would retrace back and Put Writers are Bulls because they expect the strike price at which
they have written the puts would hold and price won’t go further down.
Now,my question is how does one interpret the data associated with O.I?I mean,let’s say an Index is trading at 10,000 and finally after a month of consolidation moves to 10,500.
The O.I at 10,500 strike price in Calls sheds a million contracts while the 10,500 strike Puts adds a million in O.I,so how does one interpret whether it’s long unwinding,short covering when it came to Calls and fresh shorts initiated at 10,500 in Puts as the O.I has gone up?
Since the Price Movements associated with a certain Strike Price be it Calls or Puts are also important,the Strike Price of Calls ended up in Green while that of Puts of the same Strike price closed in Red.
So,how does after having the O.I figures,the Price data associated with a certain strike price…interpret the data?Thanks:)