While analysing the financial markets, two metrics that are most commonly used to understand daily trading activity which are open interest and option volume. Typically, they are two effective metrics for gauging the market flow and sentiment in the futures and options (F&O) contract trading.
Open Interest: It is a number of F&O contracts that are outstanding (open) in the market at any time.
Normally, unlike trading volume, open interest is updated less frequently at about once per day.
Option Volume or Trading Volume: In the stock market or the options market, option volume is a measure of the total number of shares or contracts that have been traded on a given day.
Generally, trading volume is calculated by totaling the number of contracts that are transacted within a specific period.
Open Interest versus Option Volume: The Difference
Open interest is an open contract where traders or investors are willing to carry it the next day of trading, but they must be available at the end of the day session.
On the other hand, an option volume is a closed contract where traders or investors don’t want to carry it the next day; it gets settled on the same day.
Open interest is a concept that signifies the measure of money flowing into and out of the market, while option volume is a measure of trading interest in security among market players.
The purpose of open interest is to highlight the interest speculators have in a particular contract. Option volume showcases the number of times a particular security has exchanged hands.
Open interest is generally used by speculators in F&O contracts of an asset. Similarly, option volume is used by traders in any asset or security.
Open interest can be used to interpret breakouts in a trend, while option volume confirms the exhaustion of a trend.
While option volume and open interest highlight important information related to liquidity and activity in the F&O market, these are metrics that serve different purposes as liquidity indicators.
Simply put, option volume captures the activity and liquidity of a derivative contract on a particular trading day, while open interest provides a comprehensive view of ongoing interest.
Rajiv is an independent editorial consultant for the last decade. Prior to this, he worked as a full-time journalist associated with various prominent print media houses. In his spare time, he loves to paint on canvas.