Demystifying “Open Interest” and Securities in “Ban Period”

What is open interest?

Whenever you want to buy a Future/Option contract, there needs to be a seller. The buyer buys with the assumption that the contract price would go up and the seller sells with the assumption that the contract price would go down. When a trade happens between the buyer & the seller, there’s one ‘Open Contract‘ that comes into being and the quantity of these open contracts is referred to as ‘Open Interest‘. Thus Open Interest is the total number of outstanding contracts that are held by market participants at the end of the day. Open interest applies only to the futures/options segment. Open interest, or the total number of open contracts on a security, is often used to confirm trends and trend reversals for futures and options contracts.

A common misconception is that open interest is the same thing as volume of futures and options trades. This is not correct, as demonstrated in the following example:

open interest vs futures and options trades

Open Interest

  1. On January 1, A buys an option, which leaves an open interest and also creates trading volume of 1.
  2. On January 2, C and D create trading volume of 5 and there are also five more options left open.
  3. On January 3, A takes an offsetting position, open interest is reduced by 1 and trading volume is 1.
  4. On January 4, E simply replaces C and open interest does not change, trading volume increases by 5.

Benefits of monitoring open interest

By monitoring the changes in the open interest figures at the end of each trading day, some conclusions about the day’s activity can be drawn. Increasing open interest means that new money is flowing into that contract. The result will be that the present trend ( up, down or sideways) will continue. Declining open interest means that the market is liquidating and implies that the prevailing price trend is coming to an end. A knowledge of open interest can prove useful toward the end of major market moves. A levelling off of open interest following a sustained price advance is often an early warning of the end to an up-trending or bull market.

Securities in Ban period – the why and how?

A stock goes in Ban period in F&O when its open derivatives contracts (open interest) cross 95% of the market wide position limit (total allowable contracts). Once in ban period trade is allowed only to decrease positions, basically no new contracts/fresh positions are allowed. Any increase in open position attracts a penalty of Rs 5000 per contract. The stock comes out of ban period and trading resumes only after the market wide position limit in that script comes down to 80%.

Rollover: A Rollover is when you exit a currently held F&O contract and take a similar position in the next month contract. You do a rollover because your view on the contract you’ve held remains same but the already held contract is going to expire. When you are rolling over a Future contract, you are closing your current month position thereby reducing the Open interest and then adding the same amount of Open interest by taking a new position in the next month contract. Thereby there is no net change in the total open interest of that contract, allowing you to rollover without any concerns.

In case the security is in ban period, you need to call your best discount broker and let him know that you want to rollover the existing position and in net are not going to be adding any new positions, and the broker will take this as an exception after looking at your open position, and manually enable your account to be able to rollover that contract.

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