Open Interest (OI) strategy is a trading approach that uses open interest data to make informed trading decisions in futures and options markets. Open interest refers to the total number of outstanding derivative contracts (like options or futures) that have not been settled.

Key Open Interest Strategies

1. Trend Confirmation

• If price and OI are both increasing, it signals a strong trend continuation (bullish if prices are rising, bearish if prices are falling).
• If price is rising but OI is falling, it suggests a weakening trend, meaning the rally may not sustain.
• If price is falling but OI is rising, it indicates strong bearish momentum.

1. Reversal Indication

• If price is rising but OI is stagnant or declining, it may indicate an upcoming trend reversal.
• If price is falling and OI is declining, it suggests short covering, meaning a potential bounce back in price.

1. Breakout Trading

• A breakout with high OI and volume suggests strong conviction behind the move.
• A breakout with low OI may be a false breakout and could reverse.

1. Support & Resistance Levels

• High OI at a certain strike price in options can act as strong support or resistance levels.
• Unwinding of positions (drop in OI) near key levels may indicate a breakout or breakdown.

Practical Use of OI in Options Trading

• Put-Call Ratio (PCR): High PCR (above 1) suggests excessive put buying, which may signal oversold conditions. Low PCR (below 0.5) suggests excessive call buying, which may indicate an overbought market.