I’ve read a few option books.
THANKS... This is probably the most comprehensive "greeks" article/book I’ve read.

Wonderful blog. …..
A wonder wealth of knowledge there. Thanks so much for your kindness in publishing it!

Thank you very much for the most concise and simplest option intro. Highly recommended.

So far, yours is the best blog/site on basic options notes in the web that I have chanced upon.

Monday, July 30, 2007

Difference Between Option’s Volume and Open Interest

In stock trading, you measure stock market activity & liquidity by volume. In options trading, there are two measurements: Open Interest & Volume.

Unlike in stock trading, whereby there is a fixed number of shares to be traded (i.e. number of outstanding shares), in options trading, new option contracts need to be created when a trade is placed and there is no existing contract yet. When a new expiration month initiated, there is no open interest because there are no option contracts being traded for that month yet. As trading builds up, open interest will also increase. Now, what is Open Interest?

Open interest is the total number of option contracts that are still open (i.e. have not yet been exercised, or have not been closed out by an offsetting transaction, or have not expired).

Open interest increases when new contracts are created by options buyer and seller, whereby a new buyer takes a new long position and a new seller takes a new short position.

On the other hand, open interest decreases when both the options buyer and seller with existing position close out their respective positions and the contract disappears.
Closing out the position can be done by doing an offsetting transaction (i.e. the existing buyer sells the option to close his long position while the option seller buys back the option to close his short position), or by exercising the option.

Please bear in mind that open interest only increases when new contracts are created. Hence, when a trader who does not have a position in the option before buys from another trader who has an existing long position and want to close his position by selling his option contract, open interest does not change because a new contract is not created.

Then, what is volume in option trading and how option’s volume is different from open interest?

Option’s Volume is the number of option contracts traded during a given period of time. Hence, volume reflects the number of options contracts that changed hands from a seller to a buyer, regardless of whether it is a new contract being created or just an existing contract.

For more clarity, let’s see the examples below:

On Day 0, Open interest = 0, Option Volume = 0.

On Day 1, A buys 2 option contracts and B sells 2 option contract.
Open interest = 2, Option Volume (for that day) = 2.

On Day 2, C buys 7 option contracts and D sells 7 option contracts.
Open interest = 2 + 7 = 9, Option Volume (for that day) = 7.

On Day 3, A closes out his position by selling 2 option contracts, and D closes out part of his position too by buying back 2 of his option contract.
Open interest = 9 - 2 = 7, Option Volume (for that day) = 2.
Open interest reduced by 2, because A & D have an existing position before, so this transaction is an offsetting transaction to close out their respective positions. As a result, 2 contracts disappear.

On Day 4, E buys 3 option contracts from C who wants to sell part of his option contracts (3 contracts).
Open interest = 7 (no change), Option Volume (for that day) = 3.
When E buys from C, it does not create new contracts. E who does not have a position in that option before simply replaces C who wants to exit his long position. Hence, open interest does not change.

Related Posts:
* Option Chain
* How To Determine Options Liquidity?
* FREE Trading Educational Resources You Should Not Miss
* Options Trading Basic – Part 2
* Understanding Implied Volatility (IV)
* Option Greeks

11 comments:

Eann, Daddy & Mummy said...

Hi OTB,

It is nice for you to create this blog, as an option trader beginner I benefited a lot from your post. Thanks!

Regarding this post I would like to know what is long position and short position. I don't really understand what it is, could you please explain futhur?

Thanks a lot!

OPTIONS TRADING BEGINNER said...

Hi,
Thanks for your comment. Glad if this blog can benefit you in some way or the other.

My sincere apologies for being so late to publish & reply your comment. I was having some technical problems with my computer & connections last week. Hence, I couldn't access the blog.

Regarding the question, you have a "long position" is when you buy a security (stock, option, etc.) to open a position (buyer).
And "short position" is when you sell a security to open a position (seller).

You may want to read the following related post:
Options Buyer vs Seller

Btw, Eann, you're so cute... :)

Best Regards,
OTB

Eann, Daddy & Mummy said...

Hi OTB,

Thanks for your reply. I've read your older post and I do understand now. Your are very informative.

BTW, thanks for visiting my blog, do leave your comment if you wish.

Eann's Mum

Tony Chai said...

Hi OTB :

You are doing a big favot to beginner options trader with your blog.

Open Interest is a way to determine whether the option is heavily or lightly traded. I would avoid options with little or no open interest volume in different series of option chains.

Keep up the good work.

Yours Truly,

Tony Chai
a disabled stock option trader
http://options4u.blogspot.com

Jim Collins said...

Is there a site that tracks or charts options open interest and volume?

OPTIONS TRADING BEGINNER said...

Hi Jim,

I usually get info on an option's open interest & volume from Options Chain in OptionsXpress.

However, we need to open an account with them first. It's free and no need to fund the account first. Once you open an account with them, you can use all the info available there.

For more info about OptionsXpress, you may want to read my previous post:
My Online Stock Option Brokers – Part 1

Best Regards,
Options Trading Beginner

Jim Collins said...

Sorry I wasn't clear. I meant is there a site that reports historical open interest data so we can see if volume and open interest in an option is rising or falling?

myioola said...

Hi Miss OTB,

I like your blog very much.Informative and sincere unlike some other lady people who only know how to use some form of advertisment to earn profit.
It's not easy to get people to share with us their experience.And what you did now, really really put me to shame because if it were me, i might just keep those experience with me instead of sharing with others. ;(
Anyway, i really enjoy reading your blog and hope you keep up your goodwork.I hope to learn more from you and hope in the future if i am as good as you, i will also share my experience in your blog.Thanks and have a nice day!

OPTIONS TRADING BEGINNER said...

Thanks for your the kind words, myioola!

I'm still far from good. I'm still learning too. There are still lots of things to learn.

Sure, I'll welcome you to share your experience here.

Btw, regarding making money from a blog through advertisement, just for your info, I barely make any money from this blog.

Writing a quality article for a blog really takes a lot of efforts and time.
Although many have claimed they have benefited from the blog and can learn some things w.r.t. trading for free, but normally most of them never bother to do even the simplest things (and no costs to them) like visiting the sponsors to give some supports to the blog.
Even though a few clicks would also only earn us a few cents.

I believe this not only happens to this blog, but many other blogs as well.
So, please don’t think that we trading bloggers make a lot of money from our blogs.
However, at least we’re happy when a few people (like yourself) do show their support and encouragement through their comments.
At least we know that our hard works are being appreciated by some people.

Regards,
Options Trading Beginner

admirercp said...

i believe you would go to heaven for your great kindness in sharing your deep knowledge on the options.

Anonymous said...

After years of trading options I finally understand the term "open interest". Thank You!!!