Previously in this column, we discussed how to interpret change in open interest (OI) with respect to options. To recap, you can use change in OI as a measure of liquidity in a strike. In addition, change in OI can give you an indication of the support and resistance levels on the Nifty Index. This week, we discuss change in OI with respect to futures. We show why OI on futures does not provide as much information as OI on options.
Primary position
If you were to combine futures and options, then the former will be your primary position. Why? Futures move nearly one-to-one with the underlying whereas options cannot. This is because options suffer from time decay, as time value must become zero at expiry. So, even as the intrinsic value of an option moves one-to-one with the underlying, the decaying time value slows down the option price in relation to the underlying movement.
Suppose you have a bullish view on the underlying but expect a strong overhead resistance. You would go long on futures and short a call whose strike is just above the resistance level. The objective is to capture the underlying’s directional movement through the nearly one-to-one movement in futures and gains from time decay through options, as you expect the option to expire out-of-the-money (OTM). Now, professional and institutional traders typically short options. Therefore, the build-up in OI in options gives a strong signal about the resistance or support level of the underlying. But that is not the case with futures, as futures ought to be the primary position for a trader regardless of whether the trader is long or short. So, it becomes difficult to ascertain were the balance of power lies. Sometimes, longs may win and at other times, the shorts.
The argument is no different with respect to change in OI. Suppose one lakh contracts are traded in the near-month Nifty futures out of which 20,000 contracts are carried forward as OI. It is difficult to discern signals from increase in OI because you would not know whether the longs or the shorts have the power to nudge the index in their preferred direction.
Optional Reading
Some websites combine OI with prices to discern signals about the underlying movement. An increase in OI and increase in the underlying price is an indication of long build-up. Similarly, an increase in OI and decrease in price is an indication of short build-up. Further, a decrease in OI and increase in price is indication of short covering and a decrease in OI and decrease in price is an indication of long unwinding. Logically, long build-up should be followed by long unwinding and short build-up should be followed by short covering. However, if you use the combination of OI and price as some websites do, it is not uncommon to observe short build-up followed by long unwinding and long build-up followed by short covering.
The author offers training programs for individuals to manage their personal investments
Published on June 27, 2026
