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Open Interest Explained.

WHAT IS OPEN INTEREST?

In derivatives trading, open interest, or OI, is the total number of outstanding futures or options contracts in a market at a given point of time. It is measured throughout trading hours and displayed real time on exchange websites and trading terminals. For example, at the end of market hours on Thursday, Nifty May futures on NSE had an open interest of 2.08 crore, up 3.87 lakh from the previous session. As opposed to trading volumes, which capture total buying and selling activity, open interest counts how many positions were created; that is, how many are still ‘open’.
HOW DOES OPEN INTEREST CHANGE?

Every futures or option trade has a buyer and a seller. The buyer can hold the contract till expiry or sell it to another buyer or liquidate it before expiry. Each action changes open interest differently. For example, if trader A buys 10 futures contracts from trader B, then open interest is 10. If another trader X buys 20 futures from trader Y, then the open interest accordingly adds to 30. But, if A unwinds his position of 10 futures, then open interest will decrease by 10, because these contracts cease to exist. Instead, if A sells these to another trader C, then the open interest remains unchanged since it is C who holds the contracts now.
HOW IS THIS DIFFERENT FROM TRADING VOLUMES?

In the above example, while open interest increased or decreased depending on the type of trade, trading volume only increased. When A bought 10 futures, trading volume was 10 and when X bought 20 contracts, volume rose to 30. But, when A unwound his position, open interest declined by 10, but trading volume increased to 40.
HOW TO INTERPRET OPEN INTEREST?

Analysts and traders commonly track open interest to observe unusual buildup of positions in a contract.However, open interest positions should be cross-checked with other parameters such as price.For instance, a rise in contract price along with increase in OI means long positions are being created, which are inflating the contract’s price. But if OI has reduced, then it means the inflation is caused by traders covering their short positions. Conversely, if price falls along with a rise in OI, then it means more traders are building short positions and pushing the price down. If OI falls along with the price, then it means long positions are being unwound. For futures contracts, savvy traders further look at changes in the discount or premium to the spot price to get a clearer picture of the market. So, if premiums contract, or discounts widen, along with an increase in OI, it means short positions are being added, and if OI is reducing, then it means long positions are being closed. Conversely, an expansion in premium or contraction in discount along with rise in OI means long positions are being added. In the options segment, such a direct relationship between option prices and open interest doesn’t exist. However, open interest is used to calculate an indicator called putcall ratio or PCR-OI. It is the ratio of total open interest in put options to that of call options. Traders use this to determine if a market is oversold, or overbought, thus predicting medium-term trends in the market.

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Realty cos scale down prices by 40% to attract customers

REAL estate developers have found a new way of perking up the market. Unitech, DLF, HDIL, BPTP and others are offering a 30-40% discount on ongoing projects. Analysts believe that such projects will help stimulate demand and bring in the much-needed liquidity in the industry, which is already dealing with unsold stock in projects that were launched in the past one year.

“The market might not be bouncing back as yet but because of these launches, some movement has begun for sure. This is providing prospective buyers the confidence to purchase,” says Anshuman Magazine, chairman and managing director of real estate consulting firm CB Richard Ellis.

In the last three months, DLF has launched a project each in Hyderabad and Bangalore, totalling close to 4,000 units. DLF executive director Rajeev Talwar said that of these, about 500 units have already been sold in the price range of Rs 1,850-1,890 per sq ft. “These prices are lower than prices in 1998,” he said. DLF is expecting sales to improve in the near future.

“They have realised that they cannot sit on idle land and they need to launch at current market prices,” says Mr Magazine. “The good news is that the response has been fairly good considering the current market conditions,” he adds. Unitech, too, has launched a few projects in the last two months. Unitech’s Uniworld Garden II in Gurgaon’s Sector 47 has been launched at Rs 3,250 per sq ft. “What this launch has done is that it has brought down the ticket size by 40-50% in this area,” Unitech’s corporate planning head R Nagaraju said. Mr Nagaraju said that all the 150 units launched in the first phase in Gurgaon were sold out in 12 days. The company has also launched a project in Dadar, Mumbai.

Indiabulls Real Estate launched Centrum Park at Sector 103, Gurgaon recently at a price of Rs 1,950 per sq ft. This is nearly 40% lower than prices in the area last year. Sobha Developers, which was planning a project in the same area in the Rs 3,500-4,000 range, has deferred its project.

Aashiesh Agarwaal, real estate analyst at Edelweiss Capital, feels that it is important for developers to maintain market presence. “It will help them monetise their land assets that are lying idle at the moment.”

What is reassuring is that a lot of people are back window shopping, says Aditi Vijayakar, executive director, residential, Cushman and Wakefield India. Transactions, though, are still slow and people are taking a lot longer to decide. Buyers are still uncertain about the delivery capabilities of developers, as the market has seen a number of projects going beyond deadline in recent times.