What does volume tell me that I don't already get from Open Interest?
QUICK ANSWER: Volume DOES NOT tell you that existing positions (in the OI) will be closed and rolled higher or lower. Volume ONLY tells you where market participants are actively trading contracts today.
IN-DEPTH ANSWER:
Let's take a closer look at the volume bars on this chart for NVDA:
First, remember that gamma values are always positive and highest at the money. Here's a graph of gamma values from our friends at the Options Industry Council:
We are going to adopt the same convention from the last question, where, in order to make the graphs easy to interpret, Put gamma will be marked negative and Call gamma will be marked positive. So with that in mind, we can easily see that there was a lot of Put volume on the 110, 107, 105, and 100 strikes. When we consider the performance of NVDA today, Thursday August 1st 2024, this should not be TOO surprising though:
Almost straight down all day.
So what kind of insights can we gain, if any, from our volume data?
Let's think about the nature of gamma itself. A very wise trader once told me, "gamma is a short-term phenomenon", and boy was he right. The gamma value for the NVDA 109P expiring tomorrow, Friday August 2nd 2024, is 0.068. The gamma for that same 109P expiring next week, Friday August 9th, 2024, is 0.035. The ATM option contract expiring tomorrow quite literally has twice as much gamma as next week's contract! This means that when considering these total gamma bars based on volume, we should focus very intently on the closest expiration.
So with this frame in mind, let's take a closer look at the volume bars today:
Immediately we know that 100P volume must be very high overall since that strike is so far from the ATM strike (more than 9% away). We also immediately know that the 100P volume must be very high relative to the 100C volume, since if 100C traders were more active then the magnitude of this bar would be smaller.
The Raw Data
Let's check our hypothesis by looking at the raw data:
Our conclusions were correct -- we can see very big (83,000+) volume on the 100P, and by comparison very small (4,000+) volume on the 100C. And now, this serves as our jumping off point for further analysis.
Are traders buying or selling that 100P contract? Are those 100Ps perhaps part of a 105/100 put spread? How realistic is another -9% move? Is a stock in the same sector reporting earnings after hours? Etc. etc.