Open interest, implied volatility and PCR explained

Open interest (OI)

Open interest is the number of option contracts that are open and not yet closed or expired. Every contract has a buyer and a seller, so OI counts contracts, not people. When a new buyer and a new seller trade, OI goes up by one; when both close an existing position, it goes down by one; when one trader hands a position to another, it stays the same.

Volume and OI are different: volume counts every trade today, OI counts what is still open. A strike can trade heavily all day with little change in OI if traders are only opening and closing intraday.

Reading price and OI together

Traders often combine the price change with the change in OI to guess what positions are being built:

• Price up, OI up: long build-up (new buyers).
• Price down, OI up: short build-up (new sellers).
• Price up, OI down: short covering (sellers exiting).
• Price down, OI down: long unwinding (buyers exiting).

Implied volatility (IV)

Implied volatility is the volatility that, put into an option pricing model, gives today's premium. It is the market's estimate of how much the index might move, expressed as an annual percentage. High IV makes options expensive and low IV makes them cheap, for the same strike and expiry.

IV usually rises ahead of events (results, budgets, elections, central bank decisions) and falls once the event has passed. That drop, often called IV crush, can make an option lose value even when the index moves the way the buyer wanted. India VIX is a market-wide gauge of the same idea for Nifty options.

Put-call ratio (PCR)

PCR is total put open interest divided by total call open interest for an expiry. A PCR above 1 means more puts are open than calls; below 1, more calls than puts. Because option writers (sellers) hold much of the OI in index options, many traders read a high PCR as heavy put writing (support below) and a low PCR as heavy call writing (resistance above).

PCR is a sentiment gauge, not a signal. Extreme readings are sometimes read as contrarian, and the number moves a lot near expiry. Use it alongside price and OI at individual strikes, not on its own.

Max pain, briefly

Max pain is the strike at which the total value of all open options would be lowest at expiry, in other words where option buyers as a group would lose the most. Some traders watch it on expiry day, but it is a calculation from open positions, not a force that pulls the index.

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