Volume vs Open Interest: The Short Answer
Option volume is the number of contracts traded during the current day; it resets to zero each morning. Open interest is the number of contracts still open (not closed, exercised, or expired) at the end of the previous trading day. Volume shows how active a contract is today; open interest shows how many positions exist. Rising open interest together with high volume suggests new money is opening positions, while high volume with falling open interest suggests traders are closing positions. High values in both usually mean tighter bid-ask spreads and easier trading. In Excel, MarketXLS option chain formulas such as =QM_GetOptionChain("AAPL") return volume and open interest for every contract.
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Volume vs Open Interest
When trading options, two key indicators that need to be monitored are Volume and Open Interest. Volume is the total amount of options traded in one day and Open Interest is the total amount of open positions. Volume and Open Interest are useful in analyzing any underlying asset – whether it’s a stock, a commodity, or an ETF – and can also be used to analyze the sentiment of the marketplace.
Order Flow
Order flow refers to the buying and selling activity of traders in the options market.Volume and Open Interest are used to gauge the order flow in the options market.High volume in a contract shows strong interest in it that day, but not the direction, since every trade has a buyer and a seller. High open interest shows many positions are outstanding, which usually means better liquidity; it does not by itself signal an expected large move.
Call and Put Options
Options traders can buy both call and put options. A call option gives the holder the right to buy the underlying asset at the strike price. A put option gives the holder the right to sell the underlying asset at the strike price.Buying options limits the maximum loss to the premium paid. Option sellers can earn from time decay, as time passes, the options contract will become less valuable, even if the underlying asset stays the same.
Volatility and Implied Volatility
Volatility is the measure of price fluctuations in the underlying asset, and it influences the price of an option. The higher the volatility, the greater the option premium.Implied volatility, on the other hand, is the estimated volatility of an underlying asset, as observed in the options market. It is usually quoted as an annual percentage.
Risk Management and Greeks
Risk management is essential in options trading. Traders need to know how to manage their risk in order to be successful in the long run. Options traders can use the Greeks (Delta, Gamma, Theta, Vega, and Rho) to analyze the risk of their positions and adjust them accordingly.
Hedging Strategies
Hedging strategies allow traders to protect their positions against an unforeseen move in the underlying asset. Traders can use put options to hedge against a decline in the price of the underlying asset, or call options to hedge against a rise in the price of the underlying asset.
Other Key Concepts
When trading options, traders need to be aware of other key concepts such as the strike price, the settlement price, and the time decay of options. Additionally, traders should be aware of market makers, spreads, and liquidity in the options market. They should also be aware of market conditions such as arbitrage opportunities, option chain analysis, the contract size, and the expiration date.
MarketXLS
MarketXLS is an Excel add-in that returns option chains with volume and open interest, implied volatility, and Greeks as formulas, for example =QM_GetOptionChain("AAPL") and =QM_GetOptionQuotesAndGreeks("AAPL"). Options data is end-of-day on the Standard plan and real-time on the Advanced and Business plans.
Ready-made option workbooks are in MarketXLS templates.
