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In options trading, two key metrics are often mentioned: open interest and volume. While both give clues about market activity, they each tell a different story. Open interest shows how many option contracts are still open, while volume tells you how many contracts changed hands during a specific period. Understanding their differences helps traders make informed decisions when using an options trading platform.
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What is Open Interest
Open interest refers to the total number of outstanding options contracts that haven’t been closed, exercised, or expired. It represents the total open positions at any given time, showing how many contracts are active in the market. Unlike volume, which records daily trades, open interest accumulates over time and shifts as positions are opened or closed. It’s a key indicator of market participation and can signal the strength of a price trend.
Why Open Interest Matters
Open interest matters because it gauges market commitment. Rising open interest during a price uptrend indicates that new money is flowing in, thereby reinforcing the trend. A decline in open interest during a trend may indicate a potential reversal, as traders exit their positions. It also helps identify liquid contracts, avoiding illiquid options with low open interest that may have wider bid-ask spreads and higher transaction costs.
How Is Open Interest Calculated
Open interest is calculated by summing all outstanding long or short positions in a specific option contract—only one side (long or short) is counted, not both. Each time a new buyer and seller enter a contract, open interest increases by one. When a position is closed (e.g., a trader sells an option they bought), open interest decreases by one. It’s updated daily after market close.
What is Volume in Options Trading
Volume in options trading is the number of contracts traded during a specific period, such as a day or week. It measures the total transactions between buyers and sellers, reflecting market activity and liquidity. High volume indicates active trading, while low volume suggests limited interest. Unlike open interest, volume resets daily and doesn’t account for open positions.
Why Volume Matters
Volume matters as it confirms price movements. A price increase on high volume signals intense buying pressure, while a move on low volume may lack conviction. It also affects trade execution—high-volume options allow traders to enter or exit positions more easily at desired prices, whereas low-volume options may have slippage. Volume helps identify momentum and potential breakouts.
Open Interest vs. Options Volume: What’s the Difference
Open interest and volume are fundamentally different concepts: open interest refers to the total number of active positions, while volume measures the number of contracts traded. Open interest accumulates over time and fluctuates as positions are initiated or closed, whereas volume is reset daily. Open interest indicates market commitment, while volume highlights short-term trading activity. For instance, a contract with high volume but low open interest may suggest significant intraday trading without the establishment of many new positions.
What Insights Can You Gain From Volume And Open Interest
Combining volume and open interest provides more profound insights to build a diversified portfolio. Rising price with increasing volume and open interest signals strong bullish momentum, as new traders enter long positions. A price decline with rising open interest and volume suggests bearish sentiment. If the price rises but open interest falls, it may indicate that traders are closing long positions, suggesting a weakening trend. High volume with stable open interest means that existing positions are being traded, rather than new ones. These metrics help confirm trends, identify reversals, and avoid illiquid contracts. Traders use them to assess whether a price move has staying power or is a temporary spike.
Neil McDonald, CEO of Moomoo U.S., brings 30+ years in finance with roles at Goldman Sachs, Morgan Stanley, Citadel, and JP Morgan. He started his career as an equity derivatives trader at Goldman Sachs and Morgan Stanley, and managed European equity and index options trading at Citadel Investment Group. He moved to New York in 2008 to run JP Morgan’s global electronic options market-making business and U.S. derivatives trading. Neil oversees all Moomoo’s retail businesses in the US, including broker-dealers, marketing, and products.
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