What is the difference between Open Interest and Volume?

Trading in the market requires three things — skill, study & patience. The study, in this case, refers to a thorough evaluation through research to suit the resources available to you.

Two of the most commonly used metrics in your market analysis would be open interest and trading volume. They serve as essential technical measures that help traders gauge the market sentiment regarding futures and options contract trade.

Understanding these two concepts as well as how they are different is imperative for traders. However, before jumping into an open interest vs volume discussion, it is important to understand the two on their own accord.

What is Open Interest?

Open interest in trading refers to the number of options contracts and futures contracts that are active for an asset at a given time. It is a mark of the positions of securities in the market that are not yet closed. To sum up, open interest is used as a measure of liquidity alongside market activity. Like any other security traded in the market, open interest is subject to volatile market fluctuations.

Open Interest increases when new contracts are created or opened. The increased number of open interests would mean that there are more buyers and sellers for a particular security.

Inversely, open interest decreases when positions in the existing contracts are closed out by buyers (aka holders) and sellers (aka writers). A lower open interest indicates a disinterest by investors in opening new positions.

Example:

Day 1: Let’s assume that the open interest of the ABC call option is 0.

Day 2: Investor X buys 10 options contracts as a new position. Open interest for this call option is now 10.

Day 3: Five contracts were closed, 10 were opened. Open interest increases to 15.

What is volume or trading volume?

In the trading context, the volume metric documents the number of options or futures contracts that are exchanged between buyers and sellers on a given trading day. It further quantifies the level of activity for a specific contract.

Every transaction is factored in for the computation of the daily volume. Trading volume is one of the best measures for gauging the market activity for a particular security and shows directly its market liquidity value.

When the trading volume is higher, it reflects that other investors are actively interested in a particular security, and subsequently, those orders would be executed. In addition, if the trading volume is higher along with a price change, this indicates that there is a favorable opportunity to invest as the volume metric establishes a direction, which helps investors discretion to make trade decisions. You can monitor and act upon these signals effectively using an online trading app.

Example:

Session 1: Let’s assume the volume in call option ABC with a strike price of Rs. 55 and an expiration date within 3 weeks did not trade any contracts. The trading volume is thus 0.

Session 2: An investor buys 15 call option contracts and there are no other trades that day. The trading volume is now 15.

Now that the meaning of open interest and volume is established, it’s time to understand the difference between open interest and trading volume.

Open Interest vs Volume

Preceding to pit the two against each other, it is important to note that both these metrics are significant in different ways. Open interest and volume— both are indicators of liquidity and market activities.

Open interest refers to the number of contracts in options and futures contracts that are active (or not settled) for an asset at a given time. On the other hand, volume is more specific to particular securities that are traded in a specific period.

Open interest is highly volatile, subject to dynamic increases and decreases. It gives the overall picture of active interest in a particular security. Whereas, volume measures the trade for a specific period and specific security.

Another distinct difference between open interest and trading volume is the frequency of data updates. The changes in open interest values are not frequently updated. On the contrary, the total volume is calculated and maintained by the securities exchange at the end of each day.

Final Word

An accurate analysis of the market is paramount for trading. Open Interest and Volume are both handy resources that you should utilize through your market research.