Open Interest and Implied Volatility

One of the good things coming from Vtrender Live is our fledgling community coming together to help each one out. Whilst Girish has been exceptional in bringing out the daily Open Interest configurations, highlighting the salient features with so much care, Sanjay has been rock steady pointing out important trades and giving inputs.

Sanjay was the one who brought to our notice the Open Interest building up at 5700 and 5800 PE.

Have  a Look :

Generally it is understood that smart money writes options as a hedge for their existing positions both long and short. However there are times when this tested belief may not hold true.

The above chart may just be one example of the murky business of option writing and buying.

Whilst it is a little early in the day to arrive at a definite conclusion, there is growing evidence that the activity at 5700 and 5800 would be option buying as opposed to writing.

As a rule, an increase in open interest along with an increase in Implied volatility and the price of an option would mean that longs are being created.

In this case, this would mean Long 5800/ 5700 puts.

To validate, let's look at the chart here :

As you can see there are more buyers than sellers.

Whilst this is certainly not the case for dumping all long holdings, this is a a red flag for this uptrend and we would continue to monitor the activity at these strikes for further cues.