Open Interest, PCR and OI Buildup Explained

What open interest is

Open interest (OI) is the number of futures or options contracts that are still open, not yet closed or settled. When a new buyer and a new seller create a contract, OI rises by one. When an existing buyer and an existing seller both close, OI falls by one. If one side passes its position to someone new, OI stays the same.

Volume and OI are different. Volume counts how many contracts traded today; OI counts how many remain open at the end of the day. A day can have huge volume and little change in OI if most traders were closing and reopening positions.

The four buildup types

Combining the change in price with the change in OI gives four common readings:

Long buildup: price up, OI up. New buyers are entering; usually read as fresh bullish positions.

Short buildup: price down, OI up. New sellers are entering; usually read as fresh bearish positions.

Short covering: price up, OI down. Sellers are closing their shorts by buying back, which pushes price up.

Long unwinding: price down, OI down. Buyers are exiting their longs, which pushes price down.

These are interpretations of crowd behaviour, not signals. They describe what happened, not what will happen next.

OI in the option chain

In an option chain, OI at each strike shows where traders hold positions. Large call OI at a strike above the current price is often read as an area where option sellers expect resistance; large put OI below the price as expected support. The idea is that sellers, who are often larger participants, defend strikes where they have written many options.

Changes in OI during the day matter more than the absolute numbers. A strike where put OI is rising fast shows where new positions are being added now.

Put-call ratio (PCR)

PCR divides total put OI by total call OI, usually for an index and one expiry. A PCR of 1.2 means there is 20% more put OI than call OI.

Interpretation varies. Some treat a high PCR as bullish (put sellers are confident of support) and a very high PCR as a sign the market may be over-hedged. Others watch extremes as contrarian signals. Because puts are bought for protection and sold for income, the same number can be read in different ways. PCR is most useful compared with its own recent range rather than as an absolute level.

Max pain

Max pain is the strike at which the total payout to option buyers at expiry would be smallest, in other words where option sellers as a group would gain the most. Some traders believe prices tend to drift towards max pain near expiry.

Evidence for this is mixed, and large events easily override it. Treat max pain as one rough reference point, especially on expiry day, not as a target.

Futures OI and the market as a whole

OI is also tracked for futures. Rising OI in index futures alongside a rising index suggests new long positions; rising OI with a falling index suggests new shorts. Participant-wise data published by the exchanges shows how different groups (clients, institutions, proprietary traders) are positioned in index futures and options.

At the start of a new series, OI naturally rises as positions roll in, and it falls sharply near expiry as positions close. Compare changes with the same point in previous series rather than reading every daily change as a signal.

Stock futures OI can also be compared with the market-wide position limit for that stock. When OI gets close to the limit, the exchange restricts fresh positions in that stock until it falls, which can itself affect trading.

Limits and common mistakes

OI does not tell you who is right. Every contract has a buyer and a seller; OI only counts open contracts.

Data can be noisy intraday and is often revised. Big single trades can distort a strike's OI.

Hedging blurs the picture: a call sold might be hedged by stock, so it does not necessarily express a bearish view.

Using OI alone, without price structure and risk management, tends to produce confident but unreliable conclusions.

A worked example of reading a chain

Suppose an index is at 24,050 on expiry week. The 24,200 call has the highest call OI and it rose sharply today; the 23,900 put has the highest put OI and it also rose. PCR has moved from 0.9 to 1.1 over two days.

A typical reading: option sellers are building a range of roughly 23,900-24,200, with slightly more confidence in the support side. That suggests a range-bound expectation, not a guarantee. If price later breaks above 24,200 with call OI falling at that strike (short covering), the reading changes, and traders who sold those calls may be forced to buy back, which can speed up the move.

Track OI on iTradeChart

The option chain shows OI, the change in OI and a buildup tag (LB, SB, SC, LU) for each strike, along with PCR, max pain and the strikes with the highest call and put OI. The OI buildup page lists futures across indices and stocks sorted by buildup type for the last trading day.

Use these as learning tools: note what OI suggested, then check what price did over the next days, and judge for yourself how much weight to give it.