Open Interest and Volume Signals

Volume and open interest provide insight into market activity and positioning. Volume shows today's trading activity, while open interest reveals the total number of outstanding contracts. Together, they help traders assess liquidity and gauge where significant positions exist.

Definition and Key Concepts

Volume

Volume is the number of contracts traded during the current session. Each transaction counts once—when a buyer and seller execute a trade, one contract of volume is recorded.

Volume resets to zero at the start of each trading day.

Open Interest

Open Interest (OI) is the total number of outstanding option contracts that have not been closed or exercised. It represents active positions in the market.

Open interest updates overnight after each trading day. When a new buyer and new seller enter the market, OI increases. When existing holders close positions against each other, OI decreases.

Volume vs. Open Interest Relationship

How It Works in Practice

Reading Volume Patterns

High volume at a particular strike indicates active interest. Consider why:

• New positions opening: Traders initiating directional bets
• Existing positions closing: Profit-taking or stop-losses triggering
• Rollovers: Traders moving from expiring contracts to later dates

Volume spikes often accompany price moves or news events. A sudden increase in call volume might signal bullish sentiment, though it could also represent hedging activity.

Interpreting Open Interest Levels

Large open interest at specific strikes can indicate:

• Support/resistance levels: Market makers hedging large OI may create buying/selling pressure near those strikes
• Expiration pinning: Stocks sometimes gravitate toward strikes with high OI as expiration approaches
• Institutional positioning: Significant OI often reflects hedge fund or institutional activity

Put/Call Ratios

The ratio of put volume to call volume provides a sentiment gauge:

• High put/call ratio: More puts traded than calls (potentially bearish or hedging)
• Low put/call ratio: More calls traded than puts (potentially bullish)

Extreme readings sometimes signal contrarian opportunities, but context matters—high put buying could be protective hedging rather than directional betting.

Worked Example

Analyzing XYZ Options Activity

XYZ stock trades at $48. Here's the option chain data for 30-day options:

Key Observations:

1. $50 strike dominates: Both call OI (25,670) and put OI (18,940) are highest here. This round number attracts positioning.

2. Volume spike at $50: Today's call volume (3,456) far exceeds other strikes. Either new positions are opening or existing positions are adjusting.

3. Put/call volume ratio at $50: 1,234 puts / 3,456 calls = 0.36. More calls traded than puts—today's activity leans bullish.

4. Liquidity assessment: The $50 strike has the tightest spreads (not shown) due to high activity. Other strikes have lower OI and likely wider spreads.

Potential Interpretation:

With XYZ at $48 and heavy positioning at $50, the $50 level may act as a magnet or resistance zone. If OI increases alongside rising volume, new positions are being established. If volume is high but OI stays flat, existing positions are churning.

Tracking Changes Over Time

This progression shows call buying early in the week, with Thursday seeing some call closing and put opening—potentially profit-taking or sentiment shift.

Risks, Limitations, and Tradeoffs

Volume Without Context

High volume doesn't indicate direction. A surge in call volume could be:

• Bullish speculation (buying calls)
• Bearish hedging (selling covered calls)
• Market maker inventory management
• Spread trading (volume in multiple strikes)

Without knowing whether trades are buys or sells, volume alone is incomplete information.

Open Interest Lag

Open interest updates overnight, not in real-time. During the trading day, you see previous day's OI. Large intraday trades won't reflect in OI until the next morning.

Expiration Effects

As expiration approaches, OI typically declines as traders close or roll positions. Comparing OI across different expirations requires adjusting for this natural decay.

Gaming and Noise

Some traders attempt to create misleading signals through large visible orders. Institutional dark pool activity doesn't appear in public volume data. Take volume and OI as one input among many, not a definitive signal.

Common Pitfalls

1. Assuming volume equals sentiment: High put volume might be hedging, not bearish betting.

2. Ignoring the denominator: 500 contracts traded on an option with 50,000 OI is routine. The same 500 on 200 OI is significant.

3. Chasing unusual activity: By the time volume spikes are publicized, the opportunity may have passed.

4. Confusing OI changes with price direction: Rising OI with falling prices might indicate new short positions, not bullish accumulation.

5. Overlooking multi-leg trades: Spread orders create volume in multiple strikes simultaneously, distorting single-strike analysis.

Checklist for Volume and OI Analysis

• Identify strikes with highest open interest
• Compare today's volume to average daily volume
• Calculate put/call ratios for volume and OI
• Note if OI is increasing or decreasing at key strikes
• Consider whether volume represents opening or closing trades
• Check if unusual activity aligns with news or events
• Assess liquidity (high OI typically means tighter spreads)
• Track OI changes over multiple days for trend identification

Next Steps

Understanding volume and OI helps identify liquid strikes for trading. To decode the symbology used in option tickers, see Option Symbology on US Exchanges.

For more on reading the full option chain, review Option Chain Layout and Key Stats.