What Does Open Interest (OI) Say???

Price forecast is all: we are interested in, but challenging part is how to forecast with accuracy?? There are many factors we need to analyze and track to reach on accuracy, and OI is most important among all factors. OI is not relevant in cash market as there is no such figure there, but in Futures and Options this carries a lot weightage. 

OI is a figure, which says a lot about the market sentiments. But it speaks different language for different instruments and person-to-person according to their perception. Luckily there are some common agreeable points which if we keep in mind, then we can interpret this figure more efficiently. 

In futures OI is dynamic facet, can be buyer biased while market is rallying, can be seller biased when market is falling. But in options it its always seller biased!!!! Why??? Lets understand. 

In futures buyer and seller both have equal risk exposure so both does their homework before executing and trend decides who is on right side. While in case of options seller carries incomparable risk versus buyer so we should give him due credit of doing more homework before entering the position i.e. why Put Call Ratio (PCR) is an important indicator. 

OI number of a call strike speaks about strength of resistance, higher the OI tougher the resistance. Similar significance of OI number is for put, higher the OI stronger the support level.

Rising PCR says Put OI is increasing at higher pace than Call, means seller is betting against fall of market i.e. market rally or not but downfall chances are ruled out. Similarly if PCR is falling, when Call OI is increasing faster than Put, signifies that market falls or not but significant upside moves are ruled out.