Volume vs. Open Interest

Understanding the Numbers

Contract
Contract. Google Images

New option traders are sometimes confused by option-trading terminology. The  provides some useful definitions and this article compares volume with open interest.

Using the Data

Let's say that you own 200 shares of a given stock and want to write covered calls. The initial step for most traders is to see just which options can be bought/sold. That list is known as the option chain.

Access the option chain for any stock from your broker or any exchange on which those options trade.

Then select which specific options to sell (or buy).

Traders often want to know whether any option is actively traded, or seldom trades. This piece of information is important because it is far easier to make a trade -- and get a fair price -- when trade activity is high. The more people who want to buy/sell the option, the greater the number of competitors. In other words, when there are many bidders competing with each other, it is far more likely that you will be able to sell your options at a higher price than when there is only a single market maker who is publishing a bid price. 

Volume (Vol) is the quantity of a specific option that has traded -- so far -- today. The number is updated with each trade and increases as the day progresses. It does not matter who makes the trade or whether an order is a buy or sell. Each option traded adds to the volume.

Another number that is related to volume is the open Interest (OI).

  It is the number of specific option contracts that are owned by anyone. In the normal course of trading, people buy and sell options. The OI consists of a running total of all options bought -- but which have neither expired nor been sold.

Let's consider each of four different scenarios:

  1. If you sell 5 put options that you do not own, you have written brand new options -- options that did not exist before you sold them. If the person who bought those options was opening a new position, or adding to a position (i.e., he/she already owned some of these options), then the OI has increased by 5. In other words, 5 new contracts exist after your trade and those options did not exist prior to your trade. They were 'created' by the seller.
     
  1. If you sell those 5 options to a trader who already had a short position in that option (i.e., just like you, he/she had previously sold some of these options), then the only change is that a different trader is now short those options. No new options were created. Thus OI is unchanged.
     
  2. If you sell options that you already own, then you are closing your position. When you sell them to a trader who is opening (or adding to) a position, then the open interest does not change. All that happens is that ownership of the options is transferred to another trader.
     
  3. If you sell options that you already own, then you are closing your position. When you sell them to a trader who is also closing a position (i.e., he/she is buying options sold previously) then the open interest decreases. Options that existed no longer exist.
     

The open interest is published only once per day, in the evening. This occurs after the market has closed for trading and after the OCC has fulfilled instructions from option owners to exercise their options and has issued to the appropriate people.