Lesson 10 of 20 · 6 min
What open interest and volume tell you
Volume counts today's trades; open interest counts contracts still outstanding. They answer different questions.
Every option quote comes with two numbers that look similar and mean different things.
Volume is how many contracts changed hands during the session. It resets to zero each day. Open interest is how many contracts exist and have not been closed or expired. It is a stock rather than a flow, updated once between sessions rather than continuously.
The relationship between them is informative. A trade can increase open interest, decrease it, or leave it unchanged, depending on whether each side was opening or closing a position. So high volume with rising open interest means new positions are being created, while high volume with falling open interest means existing positions are being unwound. The same volume figure means opposite things in the two cases.
What these numbers are useful for is judging whether a contract can be traded at a sensible price. A contract with open interest of three and no volume today has, in effect, no market: the quoted spread will be wide, a fill may be far from the midpoint, and closing the position later may be difficult. That is a mechanical fact about tradability, and it is the main reason to look at these figures.
What they are not useful for is inference about direction. Open interest does not record who initiated, whether the trade was opening or closing, or what either party intended. Every contract has a long and a short side, so a large figure says a lot of people disagree, not that anyone is right.
Key terms
- Volume
- Contracts traded during the current session. Resets daily.
- Open interest
- Contracts currently outstanding, not yet closed or expired. Updated between sessions, not in real time.
- Opening versus closing trade
- Whether a party is creating a new position or ending an existing one. This determines the effect on open interest.
Worked example
Same volume, opposite meaning
Two contracts each trade 5,000 times in one session.
- Contract A open interest, prior close
- 12,000
- Contract A open interest, next update
- 16,500
- Contract B open interest, prior close
- 12,000
- Contract B open interest, next update
- 8,000
- Volume in both cases
- 5,000
Up 4,500 — new positions.
Down 4,000 — positions unwound.
Volume alone cannot distinguish a market building exposure from one closing it. The open interest change is what separates them.
Check yourself
A contract shows open interest of 40,000 and today's volume of 12,000. What does that tell you about tradability, and what does it tell you about direction?
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Educational only. Nothing in this lesson is investment, legal or tax advice, or a recommendation to enter into any transaction. Figures are illustrative and computed from the inputs stated in the lesson.