Quick Answer
Volume counts contracts traded that day and resets to zero every session. Open interest counts outstanding contracts that haven't been closed, exercised, or expired, and it only changes when positions open or close on both sides at once; a contract simply changing hands leaves it unchanged.
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 measure different things and change under different conditions.
What Does Volume Measure?
- 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
What Does Open Interest Measure and When Does It Change?
- 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
| Transaction 1 | Transaction 2 | Effect on Open Interest |
|---|---|---|
| New investor buys to open | New investor sells to open | Increases (new contract created) |
| Existing holder sells to close | Existing writer buys to close | Decreases (existing contract eliminated) |
| Existing holder sells to close | New investor buys to open | Unchanged (a new holder replaces the old one) |
| New investor sells to open | Existing writer buys to close | Unchanged (a new writer replaces the old one) |
- 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. Watch for whether a specific transaction increases, decreases, or has no effect on open interest.
What Should You Check on Exam Day?
- Volume resets to zero each trading day; open interest is cumulative
- Open interest rises only when both sides open, falls only when both sides close
- A contract changing hands (one side opens, one closes) leaves open interest unchanged
- The OCC reports open interest the morning after each session; it lags, it's not real-time