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Open interest vs volume in options

Options volume is the number of contracts traded today. Open interest is the number of contracts still open at the end of the previous day. Volume shows today's activity; open interest shows positions that carry forward. Volume far above open interest at a strike suggests new positions, which you confirm when the next day's open interest rises.

SPY open interest by strike

How each number changes

Every trade adds to volume. Open interest rises only when a trade opens a new contract on both sides, and falls when a trade closes one. A trade between an opening buyer and a closing seller moves the contract between accounts and leaves open interest unchanged.

The clearing house publishes open interest once a day, before the open. Intraday tools that show it are showing yesterday's figure.

Reading them together

High volume with flat open interest the next day means traders were closing or day trading. High volume followed by a jump in open interest means new positions were built and are now held. That is the kind of activity that changes dealer gamma and shows up in the next day's GEX.

Volume alone cannot tell you whether a trade was a buy or a sell. Check whether it traded near the ask or the bid before calling it bullish or bearish.

Questions

What is a good open interest for an option?
Enough that the bid-ask spread stays tight. A few hundred contracts at a strike is usually tradeable in liquid names; the spread is the better test than any fixed number.
Why does gamma exposure use open interest, not volume?
GEX estimates the hedges dealers carry, and only open contracts need hedging. Volume includes trades that opened and closed the same day.

Related

For education only, not financial advice. See the disclaimer.

Open Interest vs Volume in Options: What Each Tells You | Obelion