Various data provided by exchange: an integral part of trading system (part 2)

Derivatives: Open Interest Data in Futures

Open Interest plays a crucial role in derivatives trading and its correlation with price changes and volume is one of the most important deciding factors in analyzing the trend.

When quote of a particular stock future or index future is displayed, the change in open interest is also mentioned, along with price change and volume. It helps to determine whether Open Interest drops with price drop (long/short liquidation), Open interest rises with price rise (long addition), Open interest rises with price drop (short addition) or open interest drops with price rise (short covering) and this correlation, if interpolated with the technical chart, can assist in analyzing the trend more accurately.

Practically, on an intraday basis, if any particular Stock Future rises, say by 2-3% and its Open Interest also rises significantly, then the stock generally rises even further on the same day. Also, if the OI adds continuously and price remains flat with a positive bias, for few days, then the chance of moving upwards on positional basis is very high.

Let’s take an example of ITC:

Cost of Carry

In derivatives trading, the difference between Spot price and future price i.e., the Cost of carry (CoC) is an important parameter. When quote of a particular stock future or index future is displayed, the current Cost of Carry is also displayed. The relation between Open Interest and Cost of carry is another important indicator of trend in derivatives trading.

Option Table

An Option table provides various data that helps in analyzing short term trends, range, support and resistance for Index Future, especially for Nifty. For Short term and Intra Day Nifty traders, this option table is extremely beneficial.

The core concept lies in the theory that Option writers are more powerful and end up making more money (mainly done by bigger market players such as institutions) whereas Option buyers are generally smaller players and most of the time they end up losing money. Further, after shifting from American style to European Style, option writing has increased manifold in the past 4-5 years, resulting in increased volume and depth in Nifty.

Hence, the high OI accumulation on call side is the act of bears or call writers, especially at ATM or very near OTM strike whereas the same on put side is believed to be the act of bulls, especially at ATM or near OTM strikes. At deep OTM strikes, OI accumulation is generally treated as speculative buying. FIIs or other HNIs generally buy Puts for protection and writes Call and Put for trading purpose. At the end of every day or during intraday trading hours, the change in Option Table indicates the support, resistance and probable trend, for very short term purpose.

For example, if there is very high accumulation of OI at 8600 PE and net OI at 8600 CE is much less than that of 8600 PE, and Nifty is trading around 8640 then 8600 should be treated as immediate support. If during the trading hours, large addition is seen at ATM Call and/or liquidation at ATM Put, it indicates immediate down trend and the opposite indicates immediate uptrend.

NSE Home Page – Live Market – Option Chain – Equity Derivatives

Live Analysis

NSE website provides some quick data reference during trading hours and at the end of the day, which are very helpful for the traders to select stocks for trading. These are

  • New 52 week high low
  • Volume gainers
  • OI spurts

NSE Home Page – Live Market – Live analysis

Trade verification

There is one more data provided by the Exchange, which is very useful for a trader. It is not related to market movement but to Investor awareness. A person can verify his/her trades from NSE website. Trade Verification module is a very simple tool to verify trades executed in one’s account. The data on trades would be available on T+1 day. At any given point in time 10 trading days” data would be available for verification.

NSE Home Page – Domestic Investors – Verify your trades

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