Previously in this column, we discussed why change in open interest (OI) can be used as a metric to understand an option’s liquidity. This week, we discuss how change in OI can be used as an indicator to understand the near-term movement in the Nifty Index. 

Shorts signal

OI increases when open positions on a strike are added to existing OI, based on a day’s trading. Suppose 20,000 contracts are added at the end of a trading day to the current OI. This means 20,000 new long positions and equal number of short positions were carried forward out of the total volumes traded during the day. Both the longs and the shorts believe they will win. Your interpretation of the change in OI depends on who is likely to dominate the price movement. The shorts typically have more power. For one, the risk involved in going short is greater than in going long. Short calls have high risk and limited reward. Long calls have limited risk and high reward. So, the premise is that a trader will short only if they have the power to manage such risk. For another, shorts are typically initiated by professional and institutional traders, who have the capital and experience to back their trades. 

If shorts have the power, how does change in OI help understand the movements in the Nifty Index? If a Nifty call strike shows significant increase in OI, it could mean that the index may not go above that level. Why? An increase in OI means that the shorts have building more short positions in that strike. They will stand to gain only if the Nifty Index stays below that till contract expiry; they are attempting to capture gains from time decay. Similarly, an increase in OI for a put strike could mean that the shorts do not expect the Nifty Index to decline below that level; for if it does, the shorts will lose on their put positions.

Some argue that a decrease in OI for calls means that the shorts are closing their position in anticipation of the Nifty Index moving above that strike. This argument may not work when you are approaching expiry as both longs and shorts typically close their positions to take profits or cut losses. At other times, if shorts close their position based on their outlook of the Nifty Index, why would the longs do too? Retail traders typically initiate long positions. Also, as these traders have an upside bias, they have a strong reason to keep their positions open to capture gains or reduce losses.

Optional reading

You should apply the change in OI as additional evidence; your primary view on an underlying should come from reading price charts. Note that an increase in OI is best used as a metric for understanding price movements in the Nifty Index, not necessarily for stocks. Also, the interpretation may not work with futures. 

The author offers training programs for individuals to manage their personal investments

Published on June 20, 2026