Published on: March 7, 2024
For comments, feedback and discussion, please visit our forum post on OIWAP.
OIWAP is a price overlay indicator created by Prasath V A B.
Guidelines for OIWAP:
- Timeframe: Strictly Daily Timeframe (1D)
- Lookback Period: Not Applicable
- Asset Class: Futures and Options of (Indices, Stocks, Commodities & Currencies).
- *Note: OIWAP on continuous futures chart is not recommended.
Introduction:
Before we start looking into OIWAP, let me explain why there is a need for OIWAP, when we already have volume weighted, time weighted and other weighted average prices.
Volume Weighted Average Price (VWAP) takes volume and price into account and provides the average price a security has traded at throughout the day, and Time Weighted Average Price (TWAP) takes price and time into account. Traders view VWAP and TWAP as executional benchmarks and they plan and execute their trades around them. Anchored VWAP allows the trader to anchor the VWAP to a specific date or timestamp, from which the VWAP is calculated. Moving averages like SMA, EMA, etc., are price weighted within a specified window of time.
All the above weighted average prices are purpose built for specific purposes, none of them takes Open Interest into account, so the need for an average price weighted by Open Interest came naturally.
Volume is not Open Interest:
Unlike Open Interest which continues from where it was the previous day, volume starts from zero every day, volume can be created by intraday traders, and they must close their intraday position by the end of the day. Whereas Open Interest shows the willingness of the traders to carry their positions for the next day, that means they have a conviction to carry forward their positions.
So, between Volume and Open Interest what should you look?
If you’re an Intraday derivatives trader, then you should prioritize Volume, VWAP could be a very useful tool. If you’re positional derivatives trader, prioritizing Open Interest over Volume could give you better insights, volume shall be used to check liquidity of the derivatives. In the end it’s completely up to the trader to choose his/her tools for the trade.
What is Open Interest Weighted Average Price?
Points to be remembered for OIWAP:
- OIWAP is not a trend following tool like Supertrend or Moving averages, it attempts to tell you the fair price on the contract level.
- OIWAP is fixedly anchored to the first trading day of the contracts.
- OIWAP is simply a rupee cost average of contracts opened.
- OIWAP changes only if there is an increase in Open Interest.
- OIWAP plus the strike price gives the breakeven level for call options on the contract level and OIWAP minus the strikes gives the breakeven level for put options on the contract level.
- The distance between the market price and OIWAP gets widened in the near expiry contracts mainly because of a lesser inflow of Open Interests when compared with the next expiry contracts.
The Open Interest Weighted Average Price ‘OIWAP’ (blue line in the above chart) serves as a benchmark, reflecting the average transaction price of contracts opened, aiding traders in assessing market sentiment and directional trends. The OIWAP changes only if there is either Long Buildup or Short Buildup, for Long Unwinding and Short Covering, the OIWAP won’t change. Because OIWAP attempts to give the average price at which the Open Interests are created.
In Options, OIWAP shall be seen as the average price per contract collected by the sellers or the average price per contract paid by the buyers. So, if you add the OIWAP to the strike price for the call option, you will get a price level and you shall treat that as the breakeven price for all the contracts which were opened at that time. And for Put options, subtract the OIWAP from the strike price, that would give the breakeven price.
Especially in the case of near expiry contracts, you would see the market price deviating a lot from the OIWAP, and it is very common, because, as the expiry date approaches for the near expiry, new inflow of open interest is relatively low, but if you look for the same strike or same underlying in the next expiry, you would see OIWAP having not deviated like what you observe in the near expiry.
How to Interpret and use OIWAP?
“Price above OIWAP is bullish, Price below OIWAP is bearish.”
When it comes to Open Interests, for every long there is equal number of shorts, OIWAP tells the average price around which or at which those Open Interests are created. What is the use of it, well, OIWAP is a theoretical breakeven price for all the open interests created, if the current price of a contract is above the OIWAP, then all the shorts are said to be in a losing side and they would be hoping or waiting for the price to come back to the breakeven price (OIWAP) in this case, to cover their shorts and potentially that could provide a support around the OIWAP. The same goes for all Long Buildups, if the current price is below the OIWAP, the longs are in the losing side, and they might wait for the price to come back or above the OIWAP to unwind their longs and this could give rise to a potential resistance around OIWAP.
Usually, it is the trapped bulls and bears who come under pressure and are forced to initiate some action based on the market movement,
Introducing LIWAP and SIWAP:
Like I’ve told you before, OIWAP changes only if there is either Long Buildup or Short Buildup. In other words, OIWAP changes only if there is an increase in Open Interest. Whenever there is an increase in Open Interest, it is a buildup, and OIWAP changes in the direction of the price.
In an uptrend, Short Buildups can happen along with Long Buildups, likewise in a downtrend, Long Buildups can also happen along with Short Buildups, OIWAP doesn’t know if it’s a Long Buildup or Short Buildup, it just simply changes in the direction of price as and when there is an increase in Open Interest.
To understand what drives the changes in OIWAP, is it the Long Buildup or is it the Short Buildup, we came up with two new Open Interest weighted average price concepts called Long Interest Weighted Average Price ‘LIWAP’ (green line in the above chart) and Short Interest Weighted Average Price ‘SIWAP’ (red line in the above chart).
In the below chart, I’ve highlighted two areas with dotted ovals, in the 1st oval, you could the OIWAP changing because of the drive from LIWAP while SIWAP remains flat and in the 2nd oval, the OIWAP is driven by SIWAP while LIWAP remains flat.
So, this is how you should understand it, in the 1st oval the change in OIWAP is driven by LIWAP, it is the Long Buildups which are driving the OIWAP, and in the 2nd oval the change in OIWAP due to SIWAP, it is the Short Buildups which are driving the OIWAP. Whenever you want to observe OIWAP changes with respect to LIWAP and SIWAP make sure to keep the input types for OIWAP, LIWAP and SIWAP same, here I’ve used (H+L)/2 for all as below image.
Perspectives on Long Interest Weighted Average Price (LIWAP):
Points to be remembered for LIWAP:
- Sellers in Long Buildup are called Contraian Sellers, LIWAP is their breakeven.
- For best case scenario LIWAP, set input type as Low.
- For worst case scenario LIWAP, set input type as High.
- To use LIWAP for interpreting the OIWAP, set input type as same as OIWAP input type, usually (H+L)/2, is recommended for OIWAP.
- In an uptrend LIWAP or OIWAP could act as a support, because of the trapped Contrarian Sellers trying to cover their short positions.
- In a sideways and downtrend market, LIWAP could act as a Resistance because of the trapped buyers trying to mitigate their losing position.
LIWAP is a theoretical calculation representing the average price at which or around which all the Long Buildups were created. LIWAP doesn’t change when there is Long Unwinding. The input type for LIWAP could be any of the following (Open, High, Low, Close, (H+L)/2, (H+L+C)/3, (O+H+L+C)/4), the interpretation of the Long Buildup could change along with the change in input type selected for the LIWAP.
If you set the LIWAP input type as High, it means you would consider Long Buildups only if there is a higher high, and all the Open Interest came in for the day would be multiplied with the high price of the day, imagine having created long interest at the highest price of the day, it is the weakest price level to enter long, so, by giving the input type as high we are coming up with a worst case scenario average price for the Long Buildup as LIWAP. Through this we hsould get an idea that all the Long Buildups happened at the entire contract level must be below our worst case LIWAP. And if you’re entering a long position above this worst case LIWAP, then you have positioned your long entry relatively worse than the worst-case long buildups.
For every single buyer in the Long Buildup there is a corresponding seller with an equal number of Short Buildups. We will call the sellers in the Long Buildup, Contrarian Sellers.
So, if the LIWAP created out of high is the worst-case average price for Long Buildups then the Contrarian sellers of the Long Buildups said to have got the best price. In an aggressive uptrend you would see even the worst case LIWAP would act as a support, because the Contrarian Sellers in the Long Buildup got trapped in the wrong side of the market and they are waiting and hoping for the market price to comes back to their breakeven level, which is the LIWAP, once if it comes back to the LIWAP then the Contrarian Sellers would cover their shorts and potentially creating a support around LIWAP. You could treat LIWAP also as a Contrarian Sellers best case average selling price.
Below is an image which shows the worst case LIWAP acting as a support in a trending market.
Perspectives on Short Interest Weighted Average Price (SIWAP):
Points to be remembered for SIWAP:
- Buyers in Short Buildup are called Contraian Buyers, SIWAP is their breakeven.
- For best case scenario SIWAP, set input type as High.
- For worst case scenario SIWAP, set input type as Low.
- To use SIWAP for interpreting the OIWAP, set input type as same as OIWAP input type, usually (H+L)/2, is recommended for OIWAP.
- In a downtrend SIWAP or OIWAP could act as a resistance, because of the trapped Contrarian Buyers trying to unwind their long positions.
- In a sideways and uptrend market, SIWAP could act as a Support because of the trapped sellers trying to cover their losing position.
SIWAP is a theoretical calculation representing the average price at which or around which all the Short Buildups were created. SIWAP doesn’t change when there is Short Covering. The input type for SIWAP could be any of the following (Open, High, Low, Close, (H+L)/2, (H+L+C)/3, (O+H+L+C)/4), the interpretation of the Short Buildup could change along with the change in input type selected for the SIWAP.
If you set the SIWAP input type as Low, it means you would consider Short Buildups only if there is a lower low, and all the Open Interest came in for the day would be multiplied with the low price of the day, imagine having created short interest at the lowest price of the day, it is the weakest price level to enter short, so, by giving the input type as low we are coming up with a worst case scenario average price for the Short Buildup as SIWAP. Through this we should get an idea that all the Short Buildups happened at the entire contract level must be above our worst case SIWAP. And if you’re entering a short position below this worst case SIWAP, then you have positioned your short entry relatively worse than the worst-case short buildups.
For every single seller in the Short Buildup there is a corresponding buyer with an equal number of Long Buildups. We will call the buyers in the Short Buildup, Contrarian Buyers.
So, if the SIWAP created out of low is the worst-case average price for Short Buildups then the Contrarian Buyers of the Short Buildups said to have got the best price. In an aggressive downtrend you would see even the worst case SIWAP would act as a resistance, because the Contrarian Buyers in the Long Buildup got trapped in the wrong side of the market and they are waiting and hoping for the market price to comes back to their breakeven level, which is the SIWAP, once if it comes back to the SIWAP then the Contrarian buyers would unwind their longs and potentially creating a resistance around SIWAP. You could treat SIWAP also as a Contrarian buyers’ best case average buying price.
Below image shows the worst case SIWAP acting as a resistance in a trending market.
For comments, feedback and discussion, please visit our forum post on OIWAP.