Open Interest: This is the number of transactions that traders have initiated but have not yet closed them. Therefore, these trades are still open. Which explains the name "open interest."
Open interest is measured as market wide position limits (MWPL) in the F&O segment. SEBI allows a pre-fixed maximum exposure that traders can initiate on any counter. MWPL measures the percentage of that limit being utilised by the traders. The higher the MWPL, the higher the greed and fear on that stock. Not only are traders are exposed financially to that counter, they are also emotionally exposed. This is where crowded entries and exits occur. Imagine a fire in a cinema hall, people will rush to the exit door and cause a stampede.
Stocks with MWPL higher than 60% attract additional margins (security deposits), are more volatile and vulnerable to bigger price swings.
If you are a high-risk trader, then go for higher MWPL counters. And, vice versa for risk averse traders.
Traders should have utilised more than 40-50% MWPL for the rally to be broad-based.
