What is Open Interest in Options Trading?
Two numbers sit side-by-side on every options chain—but confusing Volume with Open Interest can lead to dangerous liquidity assumptions.
Quick Summary
Volume counts how many contracts traded today (resets daily). Open Interest (OI) shows how many contracts currently exist and haven't been closed. Volume = activity. OI = commitment. High OI with tight spreads means safe liquidity; low OI means potential exit problems.
When you look at a stock quote, you usually see one main activity metric: Volume. It tells you how many shares changed hands today.
But when you open an options chain, you see two columns side-by-side: Volume and Open Interest.
To the untrained eye, these numbers look similar. However, confusing these two metrics can lead to dangerous assumptions about liquidity—the ability to get in and out of a trade easily.
Volume vs Open Interest: The Core Difference
Volume (The Counter)
"How much action today?"
The count of contracts traded today. Resets to zero every morning. If you buy 1 contract from Bob, Volume +1. If Bob sells to Alice later, Volume +1 again.
Open Interest (The Warehouse)
"How much money is stuck overnight?"
The total number of contracts currently active in the market. Does NOT reset daily. Only changes when new positions are created or old ones destroyed.
The Analogy: A Party
Think of the options market like a party:
Understanding the Difference
Volume = Door Traffic
If 100 people enter and 100 leave immediately, "Door Volume" is 200. But the room is empty.
Open Interest = People Inside
This tells you how big the party actually is. The real commitment.
Why does this matter? High Volume with Low Open Interest means day traders are just flipping contracts back and forth (scalping)—the liquidity is fleeting. High Open Interest means institutions are holding positions for the long haul—the market is "deep."
How Open Interest Changes
To understand OI, you need to know what happens when two traders interact. Let's look at three scenarios involving a single Call Option:
"New Money" — Contract Created
You buy a new call option (Buy to Open). The Market Maker sells you a new call (Sell to Open). A brand new contract is created.
Volume
+1
Open Interest
+1
"Passing the Torch" — Contract Changes Hands
You sell your existing call (Sell to Close). Alice buys it from you (Buy to Open). You're out, Alice is in. The contract still exists—it just changed hands.
Volume
+1
Open Interest
No Change
"Closing Time" — Contract Destroyed
Alice sells her contract (Sell to Close). The Market Maker buys it back (Buy to Close) to flatten their book. The contract is torn up—it no longer exists.
Volume
+1
Open Interest
−1
How to Use Open Interest in Your Trading
Traders use Open Interest as a "Lie Detector" for market trends.
1. Liquidity Check
Before buying an option, always check the OI:
Open Interest Liquidity Scale
2. Trend Confirmation
Strong Trend
Price ↑ + OI ↑
New money flowing in to support the rally. The trend is real.
Suspicious Trend
Price ↑ + OI ↓
Rally driven by short-covering, not new buyers. The trend might be weak.
3. "Pinning" Potential
If you see massive Open Interest at a specific Strike Price (e.g., 50,000 contracts at the $100 strike), the stock often acts like a magnet toward that price on expiration Friday. This is due to hedging activity by Market Makers.
Frequently Asked Questions
Summary: Two Metrics, Two Stories
You need both. Volume tells you if you can get into the trade right now. Open Interest tells you if it's a crowded room or a ghost town.
As a general guideline, stick to options with an Open Interest of at least 500 to 1,000 to ensure you aren't trapped in an illiquid trade with wide bid-ask spreads.
