Example of Volume and Open Interest
This is a simple example of open interest and option volume at work when a new option contract is brought to market. Work this scenario out on your own with different open interest and volume until you reach a comfort level of understanding. Some traders trade options without ever understanding these concepts. TradeWithPros wants you to be educated.
Day 0, we have a new expiration, new option.
Day 0, Open interest = 0, Option Volume = 0.
On Day 1, Trader A buys 1 option contract and Trader B sells 1 option contract.
Open interest = 1, Option Volume for this trading day = 1.
On Day 2, Trader C buys 5 option contracts and Trader D sells 5 option contracts.
Open interest = 1 + 5 = 6, Option Volume for this trading day = 5.
On Day 3, Trader A closes out his position by selling 1 option contract and Trader D closes out part of his position by buying back 1 of his option contracts.
Open interest = 6 - 1 = 5, Option Volume for this trading day = 1.
Open interest reduced by 1 because Trader A and Trader D had existing positions. This transaction is an offsetting transaction to close out their respective positions. As a result, 1 option contract is eliminated.
On Day 4, Trader E buys 2 option contracts from Trader C who wants to sell part of his option contracts (2 contracts).
Open interest = 5 (no change), Option Volume for this trading day = 2.
When Trader E buys from Trader C, it does not create new contracts. Trader E does not have an existing position in the option, he simply replaces Trader C who wants to exit his position. No new contracts were created or eliminated, they just changed hands. Open interest is unchanged. Volume reflects the transfer of ownership.