OPEN INTEREST F AND O TRICKS

Derivative Trading Rules :   OPEN INTEREST TRICKS

1.

When open interest rises during a rally, it confirms the uptrend and gives a signal that it is safe to add to long positions.

It shows that more short sellers are coming into the market. When they bail out, their short covering is likely to push the rally higher.

2.

When open interest rises while prices fall, it shows that bottom-pick­
ers are active in the market. It is safe to sell short because these bar­
gain hunters are likely to push prices lower when they throw in the
towel.

Open interest rising during a downtrend, it shows that shorts are aggressively selling while bottom-pickers are buying. Those bargain hunters are likely to bail out when falling prices hurt them, and their selling will push prices even lower.

3.

When open interest rises while prices are in a trading range, it is a
bearish sign. Commercial hedgers are more likely to sell short than
speculators. A sharp increase in open interest while prices are flat
shows that savvy hedgers are probably shorting the market.

4.

When open interest falls sharply while prices are in a trading range, it
identifies short covering by major commercial interests and gives a
buy signal. When commercials start covering shorts, they show that
they expect the market to rise. 

5.

When open interest falls during a rally, it shows that both winners and
losers are getting "cold feet." Longs are taking their profits, and shorts
are covering. Markets discount the future, and a trend that is accepted
by the majority is ready to reverse. If open interest falls during a rally,
sell and get ready to sell short.

6.

When open interest falls during a decline, it shows that shorts are cov­
ering and buyers are taking their losses and bailing out. If open interest
falls during a slide, cover shorts and get ready to buy. 

7.

When open interest goes flat during a rally, it warns that the uptrend is
getting old and the best gains have already been made. This gives you
a signal to tighten stops on long positions and avoid new buying. 

8.

When open interest goes flat during a decline, it warns you that the 

downtrend is mature and it is best to tighten stops on short positions. 

9.

Flat open interest in a trading range does not contribute any new infor­
mation.

A 10 percent change in open interest deserves serious attention, while a 25 percent change often gives major trading messages. The meaning of rising, falling, or flat open interest depends on whether prices are rallying, falling, or flat at the time of change in open interest.

More on Open Interest à

The higher the open interest, the more active the market, and the less slippage you risk while getting in and out of positions. Short-term traders should focus on the markets with the highest open interest. In the futures markets, it pays to trade the delivery months with the highest open interest.

Open interest falls when a trader who is long trades with someone who is short. When both of them close out their positions, open interest falls by one contract because one contract disappears. If a new bull buys from an old bull who is getting out of his long position, open interest remains unchanged: Open interest also does not change when a new bear sells to an old bear who needs to buy because he is closing out his short position.

Buyer ------ Seller -----                                       Open Interest

New buyer  --   New seller           ---                       Increases

New buyer   --  Former buyer sells --                      Unchanged

Former seller buys to cover New seller ---               Unchanged

Former seller buys to cover Former buyer sells----    Decreases

OPTIONS is one of the safer derivative tool to take profit out of stock market, in options you will have minimum risk higher Profit..Loss is minimum..

Future trading is very risky..