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Please reply to the following questions — Sumit Mathur

What does a change in open interest position in futures & options reflect? Is it a positive or negative signal?

A change in open interest position in futures alone is not enough to interpret the direction of movements as it may be due to an increase in long positions or short positions. A change in open interest along with the direction of price change could give us a better picture. For instance, in futures, a significant rise in open interest positions along with a sharp rise in price should signal a bullish trend.

On the contrary, a significant rise in open interest positions along with a sharp fall in price may signal the onset of a bearish trend. An increase or decrease in prices when open interest stays flat or declining may signal a reversal in price trends. Generally, trading strategies based on changes in open interest positions alone are unlikely to work effectively.

In the options market, we have the put-call open interest ratio, which is more indicative of market trends than the open interest in the futures markets. It captures the proportion of number of open puts to the number of open calls. Again, there is no way to know if the open position is with reference to options bought or sold. The ratio has, however, been used effectively to gauge market direction. A put-call open interest ratio of closer to one or more is seen as a bullish indictor. Similarly, a low put-call ratio may indicate the onset of bearish trends.

What is meant by market-wide open interest and client-wise open interest? What does a change in this position suggest?

As part of risk-management, the National Stock Exchange (NSE) monitors the market-wide open interest position and client-wise open interest positions. As the name suggests, market-wide open interest position is the open position across all members, across all futures and options contracts on a particular underlying security. It cannot exceed:

*30 times the average number of shares traded daily during the previous calendar month

*10 per cent of the number of shares held by non-promoters

When market-wide open interest position limit for a contract increases above 80 per cent of the limit for a contract, then the applicable margins on the futures & options contracts will also increase significantly.

The market-wide position limit is another parameter to keep track of for an investor. If the market-wide open interest position is rising and the stock price too is rising, it is a strong bullish signal. However, when the open-interest position limits are about to be breached, then it may emerge as a contrarian signal, but it again would be difficult to predict. It is possible for the open interest position to stay close to its limits and yet the price too may remain stable.

The client-wise position limits is to ensure that a particular trader does not control trading activity. The position limits for a client are:

*1 per cent of the free float market capitalization in terms of number of shares, or

*5 per cent of the open interest in all the futures and options contracts on the same underlying security.

Queries relating to futures/options may be mailed to

fno@thehindu.co.in

or to Futures & Options, Kasturi & sons, 859-860, Anna Salai, Chennai 600 002.

Suresh Krishnamurthy

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