OI plus price change tells you about participation. What it genuinely indicates and where the folklore begins.
Key takeaways
- Open interest counts outstanding contracts, not volume.
- Combine OI change with price change to classify build-ups.
- The idea that maximum OI is a guaranteed support or resistance is unreliable.
Open interest is the number of contracts currently outstanding. It rises when a new buyer and a new seller create a position, and falls when positions are closed. Volume counts activity; OI counts commitment.
The standard four-quadrant reading is genuinely useful: price up with OI up suggests fresh longs; price up with OI down suggests short covering; price down with OI up suggests fresh shorts; price down with OI down suggests long unwinding. It describes what kind of flow is driving the move.
Where analysis becomes folklore is in strike-level prediction. The claim that the strike with the highest call OI is a firm resistance ignores that much of that OI may be hedged, spread against another strike or held by an institution with an entirely different objective.
Use OI as one input into context, particularly for spotting crowded positioning that can unwind violently. Do not use it as a standalone entry signal, and be sceptical of anyone who presents an option chain as a map of the future.
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