An analogy to help you understand volume and open interest
Let's start with an analogy about volume and open interest using small numbers for simplicity. Let's first define volume and open interest.
Volume, as it pertains to an options contract, is defined as the total number of contracts that have been transacted in any given session.
Open interest, as it pertains to an options contract, is defined as the total number of outstanding contracts that exist in any given session.
Now, let's proceed to the analogy:
I run an electric scooter rental business.
The number of scooters that change hands represents volume and the number of scooters that are rented out and held by a renter overnight represent open interest.
Day 1:
The day starts with all scooters accounted for (0 scooters rented over night = 0 open interest)
You show up and rent a scooter (1 scooter changing hands = 1 volume). You return it to me the same day (1 scooter changing hands = 1 volume)
Volume: 2
OI: 0
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Day 2:
I wake up early to count my scooters. They're all accounted for so I know that 0 scooters were rented overnight (0 scooters rented over night = 0 open interest). I don't tally this value as the day goes on. I just do it once in the morning.
On this day you show up and rent 5 scooters (5 scooters changing hands = 5 volume). You keep all 5 scooters overnight.
Volume: 5
OI: 0
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Day 3:
I wake up up early to count my scooters. I'm 5 short so I know that 5 scooters were rented overnight (5 scooters rented over night = 5 open interest).
You hand off all 5 scooters to your friend so that they can use them (5 scooters changing hands = 5 volume). Your friend keeps all 5 scooters overnight.
Volume: 5
OI: 5
--
Day 4:
I wake up early to count my scooters. I'm still 5 short so there is no change in the number of scooters rented overnight (5 scooters rented over night = 5 open interest).
You 'opened' and 'closed' your scooter position but there was no change in the number of scooters rented overnight.
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The mechanics of the 'hand off' that took place on Day 3 is where many traders get confused. Still confused? This article might help! Why does open interest not increase by 100 if 100 contracts were opened?