Open Interest and Volume
Traders use many types of market data to make trading decisions. Two
items that are often studied but sometimes misunderstood are volume and
open interest. Volume, as the name implies, is the total number of contracts
traded during a time period. Often, volume is stated on a one-day basis, but
could be stated per week, month, year, or otherwise. Once a new period
(day) begins, volume begins again at zero. Open interest is the number of
contracts that have been created and remain outstanding. Open interest is a
running total.
When an option is first listed, there are no open contracts. If Trader A
opens a long position in a newly listed option by buying a one-lot, or one
contract, from Trader B, who by selling is also opening a position, a
contract is created. One contract traded, so the volume is one. Since both
parties opened a position and one contract was created, the open interest in
this particular option is one contract as well. If, later that day, Trader B
closes his short position by buying one contract from Trader C, who had no
position to start with, the volume is now two contracts for that day, but open
interest is still one. Only one contract exists; it was traded twice. If the next
day, Trader C buys her contract back from Trader A, that day’s volume is
one and the open interest is now zero.