imagine there are 100 traders in a hall
a game is played
the referee asks all of them
"those who believe the market is going to go up tomorrow
pl come to my left.
and those who believe the market is going to go down tomorrow
pl come to my right."
--
out of 100
12 go to left
they are having bullish view about the market
and prepared to buy call options!
--
and 8 go to right
they are having bearish view about the market
and prepared to buy put options!
--
rest 80
are neutral
and want to stay out of trade.
--
so, we can say
that the open interest is 20
and the put/call ratio is
8/12 = 0.66
--
next day
the market closes way up.
the meeting of 100 traders
is called again.
the referee says the same thing
"those who believe the market is going to go up tomorrow
pl come to my left.
and those who believe the market is going to go down tomorrow
pl come to my right."
all 12 who were bullish yesterday
are incidentally
still bullish
and come to the referee's left!
rather 6 more join them
after seeing the market sentiments!
so, now
there are 18 traders on the bullish side
who are willing to buy calls.
on the opposite side
instead of 8
only 4 turn up
who are still bearish
and willing to buy puts!
so, today
the open interest is 18+4=22
up 2 from yesterday's 20!
and the put/call ratio today is
4/18 = 0.22!
so, while the open interest has gone up
the put-call ratio has gone down!
3 comments:
What an understanding.........amazing.People may have to read a thick 200 page book to understand this.....u explained in 4 paras.........way 2 go..Only if I could learn trading from you ..........
jagmohanji,
happy holi
sriganeshh
Dear Sir,
Open Interest is different for call and put options for same strike price but in your given example you had mixed call and put in a same open interest.
Open interest increase or decrease if i am buying or selling to open a new trade in an option either it may be call or put.
Pls correct if i am wrong.
Sandesh.
Post a Comment