Analyzing Options With Volume and Open Interest
Analyzing Options With Volume and Open Interest
Volume and open interest are two very important options data that can help traders understand what is going on in the options market. it is an important part of any traderís options education. Volume and open interest helps traders make better decisions, and can make them more profitable traders. But to be able to use volume and open interest data, traders must understand exactly what each represents. Letís take a close look at volume and open interest.
Volume and Open Interest
Volume and open interest are two distinctly different things. Volume is the number of contracts traded in a day. Each day volume starts over at zero. Open interest is the number of contracts that have been createdóthat are open. Open interest is an on-going, running total.
Volume and Open interest Example
Imagine it is the day after expiration and a new contract month, the November expiration cycle, is listed for option class XYZ. A trader, Retail Joe, logs into his online retail trading account from home. Retail Joe enters a buy order to buy 10 November 65 calls. The order is routed to the exchange and executes with Mark Etmaker, a market maker on one of the U.S. options exchanges.
Because this is the first day these contracts were made available to trade, open interest was zero at the start of the day. Volume is always zero at the start of the day. After the trade is made, both open interest and volume increased: Retail Joe is long 10, and on the other side of the trade, Mark Etmaker is short 10. Therefore:
Volume: 10
Open interest: 10
Now imagine that later that day, a third party trades in the November 65 call series. Tina Trader decides to sell 10 calls (maybe as part of a covered call). It just so happens that Mark Etmaker is the market maker who buys the calls from Tina. Notice what happens with volume and open interest.
Volume: 20
Open interest: 10
Because the trade happened the same day, the trade increases volume by the number of contracts traded. But a new contract wasnít created; it just changed hands. Now, the two parties to the call are Joe and Tina; Mark Etmaker is flat. Therefore, open interest remains the same.
The next morning, volume and open interest is:
Volume: 0
Open interest: 10
Volume starts anew and open interest continues on.
Now, imagine that (coincidentally) Joe decides to sell the 10-lot to close and Tina just so happens to buy hers back at the same time; they trade with each other. Now, both Joe and Tina have no callsóthey are flat. Now volume and open interest is:
Volume: 10
Open interest: 0
Ten contracts changed hands; so volume is 10. And the existing contract was closed; so open interest is zero.
About Dan Passarelli
Dan Passarelli, is the author of the book Trading Option Greeks and the president of Market Taker Mentoring LLC. Market Taker Mentoring provides personalized one-on-one mentoring for option traders. Dan started his trading career on the floor of the Chicago Board Options Exchange (CBOE) as an equity options market maker. He also traded agricultural options and futures on the floor of the Chicago Board of Trade (CBOT). In 2005, Dan joined CBOE’s Options Institute and began teaching both basic and advanced trading concepts to retail traders, brokers, institutional traders, financial planners and advisors, money managers, employees of the SEC and Federal Reserve bank, and market makers. In addition to his work with the CBOE, he taught options strategies at the Options Industry Council (OIC). Dan has been featured on television and radio and has written numerous articles in the financial press. Dan can be reached at dan@markettaker.com. He can be followed on Twitter.
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