Many traders believe that change of OI is one indicator of the market movement in case of Options. Even the lecturers at TV channels tells much about that.
However, I have doubts about the theory.
We know that change of OI will be mainly positive if stike becomes nearer to the market price. The reason is traders will take position for nearer strike. At the same time Open Interest will reduce if a strike becomes IN the money as many position holder will reduce position of square off.
Suppose Nifty was trading at 7800. If NF falls to day to 7650, we may see a OI increase for 7600 PE and 7700 CE.
Okay it may happen that Change of OI for 7600 PE will be more than 7700 CE, but can we belive that more people think market will fall? Are those 7600 writers fool (in case no hedging was done)?
At the same time you may see increase of OI for 7800 CE, because it becomes cheaper and many will buy in speculation of bounce back. Writers will also be happy to write it, because it will be far and Theta will benefit them.
So, how will you decide which way market likely to move tomorrow?
However, I have doubts about the theory.
We know that change of OI will be mainly positive if stike becomes nearer to the market price. The reason is traders will take position for nearer strike. At the same time Open Interest will reduce if a strike becomes IN the money as many position holder will reduce position of square off.
Suppose Nifty was trading at 7800. If NF falls to day to 7650, we may see a OI increase for 7600 PE and 7700 CE.
Okay it may happen that Change of OI for 7600 PE will be more than 7700 CE, but can we belive that more people think market will fall? Are those 7600 writers fool (in case no hedging was done)?
At the same time you may see increase of OI for 7800 CE, because it becomes cheaper and many will buy in speculation of bounce back. Writers will also be happy to write it, because it will be far and Theta will benefit them.
So, how will you decide which way market likely to move tomorrow?