Volume and Open Interest
With an understanding of how options are priced, you also need to know how market activity is measured. Volume and open interest are two key metrics that appear on the exam; they measure different things and change under different conditions.
Volume
- Volume is the total number of contracts traded during a given trading day
- Volume resets to zero at the start of each new trading day
- High volume indicates active trading and greater liquidity for that option series
- Volume counts every transaction: opening trades, closing trades, and transfers
Open Interest
- Open interest is the total number of outstanding contracts that have been opened but not yet closed, exercised, or expired
- Open interest is a cumulative figure that changes daily
- It is officially reported by the Options Clearing Corporation (OCC) the morning after each trading session (it is a lagging number, not real-time)
How Open Interest Changes
| Buyer's Action | Seller's Action | Effect on Open Interest |
|---|---|---|
| Buy to open | Sell to open | Increases (new contract created) |
| Sell to close | Buy to close | Decreases (existing contract eliminated) |
| Sell to close | Buy to open (new seller) | Unchanged (contract transfers hands) |
| Buy to open (new buyer) | Sell to close | Unchanged (contract transfers hands) |
- Open interest increases only when both sides open new positions
- Open interest decreases only when both sides close existing positions
- When one side opens and the other closes, the contract simply changes hands; no net change
Exam Tip: Gotchas
Volume and open interest measure different things. Volume counts daily trading activity; open interest counts outstanding positions. A high-volume day does not necessarily increase open interest. If existing holders are selling to existing writers (both closing), volume is high but open interest falls. The exam may test whether a specific transaction increases, decreases, or has no effect on open interest.