Open interest

Open interest counts contracts that exist right now. When a new buyer and a new seller trade, one contract is created and OI rises by one. When a holder of a long and a holder of a short both close, OI falls by one. When an existing holder simply sells to a new buyer, the contract changes hands and OI does not change.

That is the difference from volume. Volume counts every trade during the day and starts again from zero each morning. OI is a running balance carried from day to day. A contract can have huge volume and flat OI if the day was mostly intraday traders getting in and out. Every contract has one long and one short, so OI is never bullish or bearish by itself.

Indian traders read OI together with price. Price up with OI up is usually read as fresh longs; price down with OI up as fresh shorts; price up with OI down as short covering; price down with OI down as long unwinding. On the option chain, strikes with the largest call and put OI are watched as likely resistance and support, on the reasoning that writers will defend them.

The common mistake is treating these readings as facts. OI does not tell you who is long or short, whether a position is a hedge, or whether an option was written as part of a spread. Large OI at a strike can unwind in minutes on a fast day. Near expiry, OI in the near contract also drops because of rollover, not because opinion changed.