Quick Answer
Volume is the number of contracts traded during a period; open interest is the total number of outstanding contracts not yet offset. Open interest rises when a new buyer meets a new seller and falls when both sides offset. Rising price with rising volume and rising open interest confirms a healthy trend.
This section ties the unit together. Price alone cannot tell a strong trend from a weak one; the participation behind the move is what confirms it, and that means keeping volume and open interest straight.
Volume vs Open Interest
The core distinction is that one counts activity in a session and the other counts positions still on the books.
- Volume: the number of contracts traded during a period. Each matched buy and sell counts once. It measures activity in that session.
- Open interest: the total number of outstanding contracts that have been entered into and not yet offset (or fulfilled by delivery). It measures how many positions are still open.
| Measure | What it counts | Resets each period? |
|---|---|---|
| Volume | Contracts traded in the period | Yes, counted fresh each period |
| Open interest | Contracts still open (not yet offset) | No, it carries forward and changes as positions open and close |
Think of it this way: in a poker game, volume is how many hands were played this session, while open interest is how many bets are still live on the table. A busy session can play many hands (high volume) while the number of open bets barely changes.
Exam Tip: Gotchas
- Volume = contracts traded; open interest = contracts still outstanding. Do not swap them. A single session can post heavy volume while open interest holds steady, because traders can be passing existing contracts around rather than creating new ones.
How Open Interest Changes
Open interest moves in three different ways depending on who is on each side of the trade.
| What happens | Effect on open interest |
|---|---|
| A new buyer meets a new seller (a brand-new contract is created) | Rises |
| Both sides offset (an existing long and an existing short both close) | Falls |
| A new trader takes over an existing position (the contract changes hands) | Unchanged |
- Open interest rises only when new money enters on both sides at once: a new long and a new short both open.
- Open interest falls when both sides are closing: an existing long sells to an existing short who is buying back, and the contract is extinguished.
- Open interest is unchanged when one side simply passes its position to a new participant.
Exam Tip: Gotchas
- Open interest rises only when BOTH sides are new. A trade where one party is closing and the other is opening just transfers the contract, leaving open interest unchanged. It falls only when both parties are closing.
Confirming a Price Trend
Volume and open interest read together tell you whether a price move has real conviction behind it.
- Rising price + rising volume + rising open interest = a strong, healthy trend. New money is entering and participants are backing the move.
- Rising price on falling volume and/or falling open interest = a weak, suspect move. Money is leaving rather than committing. A classic example is a rally driven mainly by short covering (traders buying to close short positions) rather than fresh buying.
- The takeaway: rising open interest signals new money and conviction confirming the trend, while falling open interest signals the trend may be running out of support.
Think of it this way: a price rise on rising open interest is a crowd streaming into the stadium (new participants committing). A price rise on falling open interest is the crowd heading for the exits even as the score ticks up; the move looks fine on the scoreboard but the support behind it is draining away.
Exam Tip: Gotchas
- A price move on FALLING open interest is suspect, even if price is climbing. Falling open interest on a rally often means short covering, not fresh conviction. If a question calls a rally "healthy" or "confirmed," look for rising volume AND rising open interest behind it.