Open interest and volume in options trading


open interest and volume in options trading

One of the things every options trader should do before entering a position is gauge the amount of trading activity in the options they wish to trade. Failing to run a quick liquidity check can leave an options trader stranded in a position, forced to exit at an unfavorable price. Two metrics that every options trader should look at before entering a position are volume and open interest. An option's volume is the total number of contracts that have been traded options that trading day. The following chart shows trading estimated total number of option contracts that were traded for various products in As we can see here, almost a billion option contracts were traded between SPY and AAPL alone, which indicates both SPY and AAPL options volume very actively traded. So, option volume can be used to gauge the trading activity for a particular stock's options. Next, we'll talk about open interest. An option's open interest represents the total number of contracts that are open between any two parties. In other words, open interest is the number of option contracts that have been opened, but not yet closed. Let's run through a basic example to demonstrate how open interest works. Consider interest following trade orders that are routed by two different traders, but on the same option contract:. Here, Volume A is buying 5 contracts to open and Trader B is selling 5 contracts to open. If both traders are filled trading their orders, the option's open interest will increase by 5 because two traders have opened positions in that contract. What happens when one of the traders closes their position while another trader opens a position? Consider the following trades: As we can see here, Trader B bought 5 contracts to close while Trader C sold 5 contracts to open. In this case, open interest remains at 5 because there are still 5 contracts open between Trader A and C. However, if Trader A sells 5 contracts to close and Trader C buys 5 contracts to close, open interest will decrease by 5: So, open interest represents the number of option contracts that are open in the market between two parties, though you don't need to be concerned about the specific parties. In summary, open interest increases when two parties get filled on opening orders, and decreases when two parties get filled on closing orders. Open one party has an opening order and the other has a closing order, opening interest will not change assuming both orders have the same number of contracts. An option's volume and open interest are very important to you as an options trader because you do not want to get caught trading illiquid options low volume and low open interest. Illiquid options tend to have wide bid-ask spreads, which can single-handedly wipe out a trading account over time. Additionally, it's hard to get out of open option position when volume and open interest are low, which means losses may grow larger due to the inability to exit a position. Additionally, if you trade options with a high level of open interest, its an indication that the option may have heavy trading volume in the future when those market participants go to close their positions. So, what are ideal levels of volume and open interest? At this point, you understand the basics of volume and open interest, and why they're important to you as an options trader. In the next section, we'll go over which options on a stock tend to have the most of each. So, you know what option volume and open interest are, but which options tend to have the highest of each? First, we're going to compare the volume and open interest of SPY options at each strike price on a single trading day. To analyze the volume and open interest based on the strike price, we chose a day from early and plotted the volume and open interest of calls and puts at each strike price. We used the expiration cycle with approximately 50 days to expiration. Let's take a look:. Regarding volume, open can see that the most actively traded options are the ones with strike prices near the stock price at-the-money options. Less and less trading volume tends to occur in the options that are further away from the stock price. So, options with strike prices close to the current stock price tend to be the most interest traded. Next, we'll compare the volume and open interest across multiple expiration cycles. In this next section, we'll use SPY and AAPL options to analyze the volume and open interest across multiple expiration cycles. In both examples, we chose a day in early and analyzed the volume and open interest for multiple expiration cycles. Let's start with SPY:. Here, we and see that the near-term expiration cycles clearly have options highest volume and options interest compared to the longer-term expiration cycles. In this case, the day expiration cycle has the highest open interest but not the highest trading. This could be caused by traders volume near-term option positions, therefore lowering the open interest in the short-term cycles. Let's take a look at AAPL's options to volume if the same trend exists:. Some possible explanations are that more traders have longer-term theories regarding AAPL, or that more traders are using longer-term cycles for stock replacement strategies. In most stocks, the option volume and open interest will be greatest in the near-term option cycles less than days to expiration. Additionally, the options with strike prices near the stock price at-the-money tend to have the most overall trading activity. Understanding these key trading can help you stay in liquid products, which will benefit you by keeping your "hidden" trading costs low, as well as ensuring you'll be able to exit a position more easily if it moves against you. You've learned the basics of volume and open interest, as well as which options tend to have the most of each. Be sure to recap the main points below. Interest are the essential points to remember about option volume and open interest: An option's volume indicates the total number of contracts that have traded on the current trading day. As a guideline, only trade options with volume in the s preferable 1,s and open interest in the 1,s preferably 10,s. Near-term options less than days to expiration tend to have the highest amount of volume and open interest. Regarding strike prices, at-the-money options tend to have the most overall volume, while even strike prices,etc. Neither projectoption or any of its officers, directors, employees, other personnel, representatives, agents or independent contractors is, in such capacities, a licensed financial adviser, registered investment adviser, registered broker-dealer or FINRA SIPC NFA-member firm. Nothing interest in our content constitutes a solicitation, recommendation, promotion, or endorsement of any particular security, other investment product, transaction or investment. Trading Futures, Options on Futures, and retail off-exchange foreign currency transactions involves substantial risk of loss and is not suitable for all investors. You should carefully consider whether trading is suitable options you in light of your circumstances, knowledge, and financial resources. You may lose all or more of your initial investment. Opinions, market data, and recommendations are subject to change at any time. Past Performance is not necessarily indicative of future results. Home Learn Options Basics Options Strategies Option Greeks Implied Volatility Strategy Backtests Trade Adjustments Blog Members Dashboard My Account About Contact Log In. Which Options Have the Most Volume and Open Interest? Summary of Main Concepts. Open Interest A Buy 5 Contracts Open 5 B Sell 5 Contracts Open. Open Interest B Buy 5 Contracts Close 5 C Sell 5 And Open. Posted by Chris 6 months ago in Options Trading Basics. Navigation Home About Options And Basics Implied Volatility The Option Greeks Options Strategies The Blog Join Premium FAQ. Exclusive options trading content delivered weekly.

2 thoughts on “Open interest and volume in options trading”

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