Open interest vs volume is the common term in trading. volume & Open Interest are two measurements that relate to liquidity, or how easy it is to get in and out of an options position at a reasonable and fair price. Learn how this works and what to look for when placing trades!

New traders are often confused about the difference between open interest and volume. What causes these numbers to change? And why is it possible to have volume with no change to open interest?

Today we’re examining two important measurements critical in helping traders describe liquidity and activity in options markets. These two terms open interest and volume are almost always displayed on any options detail page. On Robinhood, they are the first two items in the breakdown section but these two measurements can be surprisingly confusing. Most new betrayers don’t understand the open interest in volume. 

And in this article, I look to clear things up by giving you a detailed breakdown of the two metrics that Open Interest Vs Volume. By understanding them you will add to your toolset which in turn will help you achieve profitability and risk reduction

Understanding Open Interest

We start with the simple understanding, that volume and open interest both describe the liquidity and activity level of contracts and options markets. Remember almost every experienced trader will tell you to primarily focus on trading options that are highly liquid. So please make sure you understand this.

There are all kinds of issues and drawbacks to trading options. With very low activity as the bid-ask spread and other factors can put you at a massive disadvantage. Unless you really know what you’re doing you shouldn’t be trading options where liquidity is low. On top of this understanding, the volume and open interest measurements will help you make some basic inferences about the potential future movements of an underlying stock.

Unlike stocks which have a fixed number of shares outstanding with each company. There is no minimum or a maximum number of option contracts that can exist for an underlying stock. The number of options is simply determined by trader demand. 

When you’re trading options you’re doing one of four things:

1. Buying to Open 
2. Buying the Close 
3. Selling to Open
4. Selling to Close

This is why I’m Robinhood when you go to make options trade it simply doesn’t ask you to buy or sell. You have options, no pun intended. You have the ability to write and the ability to buy.

Another way of thinking about this is to understand that the options market is not like a game of hot potato. Options are not passed around between people always winding up in someone’s hand, this is unlike stocks.

For example, when I go to sell my Tesla stock someone else buys it. The total number of Tesla stocks in the market never changes. It’s a fixed number called shares outstanding. As mentioned earlier, options do not work like this. The number of options could be unlimited so long as there is enough demand. Someone needs to look at the bigger picture, and get a count of outstanding option contracts within the market.

And this is where OCC or Options Clearing Corporation comes in.

Just like we all have learned in school, for every buyer there must be a seller. Since you cannot buy something that isn’t for sale. This concept defines a contract. A contract was considered open until a counterparty closes it. Adding up these open contracts defines the open interest or simply the number of contracts that have not been settled. So in our world, this is a count of contracts that have not been closed out expired, or exercised.

Understanding Volume

Volume indicates the number of contracts that have been bought or sold. As an example, Paul sells two puts two Brad, or the other way around to look at it Brad buys two puts from Paul. This action would add two ticks to the volume figure for that particular option.

Volume can never go down it can only go up. This may sound wrong but think about it. Options are time-limited assets meaning they expire at a certain date and cease to exist. Volume indicates the number that had been bought or sold and this number can only go up.

You might be having trouble wrapping your head around the words. So let’s jump into a couple of examples so we can understand this.

First volume as it’s a little easier let’s take a look at Tesla’s option chain on Robinhood.

Specifically, we’re looking at the Tesla January 17’th 2020, $270 dollars call. It currently has an open interest of one thousand forty, and a volume figure that reads 78. This means that this specific option has been exchanged between buyers and sellers 78 times.

For every buyer, there is a seller in the transaction itself counts towards the daily volume. Investors see volume as an indicator of the strength of the trade. The higher the volume the more interest there is in the underlying security. A higher volume also means better liquidity. Meaning it’ll be easier for a trader to get out of security faster if need be.

Open interest on the other hand reads 1040. This means there are 1040 contracts held by investors and traders and so-called active positions. These positions have not been closed out expired or exercised. This number can decrease when two holders and writers aka the buyers and sellers of these options close out their positions. In order to close out their portions, they must take offsetting positions or exercise their options.

Open interest can increase when investors and traders open new long positions or writers a case sellers take on new short positions. It can also increase when new options contracts are created. Remember there is no limit to how many options contracts can be created, as long as there is demand there could be more and more contracts.

Final Words

Volume and open interest are two key technical metrics that describe the liquidity and activity of options and futures contracts. Volume refers to the number of contracts traded in a day, and open interest signifies the number of contracts that are active and outstanding. You can take a look at what each movement for each of these specific numbers may mean for a stock by looking into a great article on Investopedia. And If you are interested to know, how to Do Forex Trading Fundamental Analysis? Just Click Here.