Editor's Note: Options are not suitable for all investors. Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Please see the Characteristics and Risks of Standardized Options.
Options volume measures the total number of contracts traded during a session, while open interest indicates how many contracts remain open at the start of each trading day. Traders use these metrics to evaluate market liquidity, investor activity, and potential price trends.
Understanding how these metrics work, how they’re calculated, and what they can reveal about the market can help investors sharpen their trading strategies.
Key Points
• Option volume monitors all transactions in real-time, reflecting market activity.
• Open interest measures the number of open contracts at the start of a trading session.
• Volume serves as an indicator of liquidity and cash flows in the market.
• Open Interest provides confirmation of cash flows and market sentiment.
• Technical traders use both volume and open interest to validate trends and make decisions.
How Is Option Volume Calculated?
Option volume differs fundamentally from stock volume. In stock investing, volume represents the number of shares trading hands. Typically, trading volumes for stocks are much lower compared to options volumes.
Options volume frequently surpasses the total contracts outstanding represented by open interest. Options volume is calculated in real-time after every transaction. This information is typically reported within the options chain, and will be updated as frequently as your particular brokerage and account provides.
Every contract traded is counted toward total volume.
• Buying 10 call contracts increases option volume by 10 during the trading session.
• Selling those same 10 call contracts to a second investor, increases volume by another 10. Closing those 10 call contracts increases volume by another 10.
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How Is Open Interest Calculated?
Open interest is calculated the same way for options trading as it is for futures trading. This information is also reported within the options chain, but it’s updated once daily prior to the market opening and will not change during the course of a trading session.
Open interest represents all contracts that remain open and nets out trades from the previous session that offset one another.
Using the same trades as above:
• If you buy to open 10 calls, open interest does not change during the trading session.
• If you then sell these calls to a second investor, the open interest does not change.
• If this second investor then closes these 10 calls, the open interest decreases by 10, since the contracts are no longer active.
However, at the end of the session, the Options Clearing Corporation (OCC) nets out any offsetting trades and reports only the remaining open contracts.
In this example, since the options were opened and closed on the same day, and despite having changed hands, the net effect on open interest is zero.
What Do Option Volume and Open Interest Indicate About Options?
As far as assessing what these two data points indicate, it depends on whether you consider yourself a “fundamental” trader or a “technical” trader.
• Traders who use fundamental analysis believe in analyzing company and market data to evaluate the intrinsic worth of a stock. They look at corporate metrics such as profits, operating margins, and debt ratios, as well as some limited market data.
• Traders using technical analysis focus primarily on market data, and use this data to predict market sentiment and price movements.
Fundamental Analysis
Fundamental traders look at the open interest as an indicator of liquidity in the market. Higher open interest typically corresponds with narrower bid-ask spreads, indicating greater liquidity.
Taken together, these two factors result in faster order execution and more competitive pricing.
Fundamental traders view options volume as an early indicator of trading activity. But the direction of this activity — whether investors are opening or closing positions — becomes clear only after comparing open interest from the previous day. An increase in open interest can confirm new money entering positions, and declining open interest can indicate positions are being closed.
Recommended: What Are Calls vs Puts?
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Trade options with SoFi Invest on an easy-to-use, intuitively designed online platform.
*Check out the OCC Options Disclosure Document.
Technical Analysis
Technical traders also look at open interest and options volume as indicators of liquidity and cash flows, but their analysis doesn’t stop there.
Technical traders look at these increased cash flows and liquidity improvements and believe that the strength in the options volume and open interest indicate confirmation of the trends occurring in the price of the underlying asset.
For example, if the underlying asset is seeing price increases and call volumes and open interest are also increasing, then the technical trader sees confirmation of the trend and these factors reinforce the likelihood of the trend continuing.
Conversely, slowing changes in options volume and open interest may signal that current underlying market trends could be weakening.
Unusual Volume and Open Interest
Although the following phenomenon falls under technical trading, it should really be its own brand of trading.
Experienced traders sometimes interpret sudden spikes in volume and open interest as signs that institutional or well-informed market participants are taking positions. However, these spikes do not always indicate a clear trend and can be misleading. These interpretations can be speculative. Institutional investors often have access to more data and advanced strategies, but their trades do not always indicate a clear direction for the market. Retail investors should be cautious when assuming that increased activity reflects a predictable trend.
It’s also important to consider why these investors may have made the decisions they have. For example, it might be part of a single position, multiple investment types, or a combination trade, all of which could involve different goals than those of a retail investor.
| Option Volume | Open Interest |
|---|---|
| Total of all transactions during a trading session | Total of all open contracts at the start of a trading session |
| Updated continuously after every transaction | Updated once per day prior to the trading session |
| Opening a transaction increases the volume | Opening a transaction will increase Open Interest |
| Closing a transaction increases the volume | Closing a transaction will decrease Open Interest |
| Indication of liquidity | Indication of liquidity |
| Indication of cash flows | Confirmation of cash flows |
The Takeaway
By tracking changes in options volume and open interest, investors may gain insights into market trends and liquidity. For instance, rising open interest coupled with increasing volume may signal that a price trend could continue.
Conversely, declining open interest could indicate weakening market momentum or trend reversals. Investors who integrate these signals into their trading strategies may enhance their ability to make informed and timely decisions.
Investors who are ready to try their hand at options trading despite the risks involved, might consider checking out SoFi’s options trading platform offered through SoFi Securities, LLC. The platform’s user-friendly design allows investors to buy put and call options through the mobile app or web platform, and get important metrics like breakeven percentage, maximum profit/loss, and more with the click of a button.
Plus, SoFi offers educational resources — including a step-by-step in-app guide — to help you learn more about options trading. Trading options involves high-risk strategies, and should be undertaken by experienced investors. Currently, investors can not sell options on SoFi Active Invest®.
Photo credit: iStock/BartekSzewczyk
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Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
*Borrow at 11%. Utilizing a margin loan is generally considered more appropriate for experienced investors as there are additional costs and risks associated. It is possible to lose more than your initial investment when using margin. Please see SoFi.com/wealth/assets/documents/brokerage-margin-disclosure-statement.pdf for detailed disclosure information.
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