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Interactions between Volume and Open Interest

General Options

Volume and open interest are two data points that you'll deal with on a regular basis as an options trader. For the purposes of this quick write up we will be dealing with volume and open interest as they pertain to options contracts.  

 

Volume

Volume is straightforward and can be defined as:

The number of contracts that have been transacted during any given session.

 

Used in a sentence:

'Today the $ABC 100 strike calls expiring this week saw 10,000 volume.'  

Any kind of transaction counts towards volume, which can only increase. That is to say whether you are buying to open (BTO*), selling to open (STO*), buying to close (BTC*), or selling to close (STC*), all of these actions count towards volume.

*: BTO/STO/BTC/STC is another concept that you must know inside and out. Reference this glossary entry. 

 

Example:  

  • Jack buys to open 100 contracts (volume is now 100).
  • Jill sells to open another 100 contracts (volume is now 200 [100+100]).
  • Joe, who already owned 50 contracts, sells to close his position (volume is now 250 [100+100+50]).

 

Open Interest

Open interest is where things start to get tricky. Let's define open interest as:

The number of existing contracts for any given option.

Used in a sentence:

'There is 5,000 open interest on the $ABC 100 strike calls.'

The definition is literal:

It doesn't matter if the contracts were longed (BTO) or shorted (STO): any kind of existing contract counts towards open interest. Due to this fact a call contract with high open interest isn't necessarily bullish nor is a put contract with high open interest bearish. 

There's another wrinkle... As previously stated the definition is literal: 'it is the number of existing contracts for any given option.'

This leaves room for the potential for a trader to start a new position or close an existing position and see neither an increase nor decrease in open interest.

 

Example:

  • The $ABC 100 strike call has 0 open interest on Monday morning.
  • During Monday's session I buy to open 5 of the $ABC 100c. No other activity takes place.
  • On Tuesday morning the open interest on these contracts is 5.
  • During Tuesday's session I decide that I want to close my entire position. I set a sell order that isn't filled.
  • You decide that you want to start an $ABC 100 strike call position. You put in a buy order for 5 contracts which happens to meet the price of my open sell order.
  • I have now closed my 5 calls and you have now bought 5 calls.
  • On Wednesday morning the open interest on these contracts would remain at 5.

 

Does that make sense? Here are some real world examples in which large amounts of contracts were closed without a similar decrease in open interest the next sessions:

Hopefully these examples resonate!

 

How Volume and OI Interact with each other

A few basic analogies I've put together to try and describe how volume and open interest interact with each other: