There are 3 main indicators you would use to assess derivatives like Futures and Options.

These are: Open Interest, Volumes and Put-Call Ratio (PCR)

Let’s start by understanding Open Interest.

Let’s say Rishabh sells 1 contract to Neha. He is said to be SHORT on that contract and Neha is said to be LONG on the same contract.The Open Interest in this case is 1.If Neha sells her position to Vishal, the Open Interest still remains 1.

Once Vishal takes delivery for the agreed price from Neha, the Open Interest squares off to Zero.

On any date, Open Interests are the number of options or futures contracts that are not closed or delivered.

Here’s an example of a fictional company LMS, whose ‘July Futures’ is being traded in lots of 250 units each:

The Open Interest for ‘LMS July Futures’ today in the entire market therefore, is 1,26,10,500. OI is analysed by traders in conjunction with price.

Volumes indicate how many shares are bought and sold over a given period.

Here’s a fictional trading day. The more active the share, the higher would be its volume.

High volumes indicate the presence of institutional or influential buyers. Low volumes indicate retail participation. When you associate it with price and volume trend, then inferences can be made regarding market trends.    

The Put Call Ratio helps us identify extreme bullishness or bearishness in the market.

This simple ratio tends to signal an upcoming trend reversal.

If the PCR value is above 1, One can look for reversals and expect the markets to go up.

If PCR PCR value is around 0.5 and below, one can expect the markets to go down.

Values between 0.5 and 1 can be attributed to regular trading

Taken together, OI, Volumes and PCR help us confirm trends and patterns to gain market insights.

Talk to our advisors to know how you can use indicators to your advantage. Know More to Grow More

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