BQLearning - F&O Series: Open Interest And Market Wide Position Limit
BQLearning is a special show that seeks to demystify financial markets, economic theories, legal processes and political structures.
In this series we explain how the most commonly used derivatives - futures and options, work in equity markets, the advantages they offer and the risks associated with them.
Open interest is the number of contracts or positions outstanding in futures and options on an exchange. It may be denoted in a number of contracts or the number of shares. It is computed by summing up net open positions in the derivative of an index or stock. These positions must be closed on expiry if not squared off earlier.
Open interest in any derivative cannot exceed the market-wide position limit set by exchange without incurring a penalty. A market-wide position limit is the maximum number of open positions allowed across all F&O contracts of the underlying stock.
The market-wide position limit is 20 percent of the free float market capitalisation of a stock. There is no market-wide position limit for indices. It is applicable only to stocks which are eligible to be traded in the derivatives segment. Open interest along with price has a lot of relevance in evaluating how positions are moving in a stock.
In this video, Amit Shah, technical and derivatives analyst of BOB Capital Markets explains how to interpret the change in open interest with respect to the movement in prices of that particular security.