Been trying to understand the relationship between volume, open interest, and option prices.
I’ve noticed some patterns, but I’m not sure if I’m interpreting them correctly.
Anyone have experience with this? How do you use these metrics in your trading decisions?
Volume acts as a liquidity signal while open interest shows overall contract activity.
Higher volume can tighten spreads and better price discovery, and open interest gives clues about market commitment. Both help inform trade decisions.
Volume and OI are tricky. I once lost big on a low volume option, thinking I’d found a hidden gem.
Now I use them as sanity checks. High volume usually means easier entries/exits. Rising OI with price going up? I get more confident in my bullish trades.
But they’re just tools. Your strategy and risk management are what really matter.
Volume: liquidity indicator, affects spread tightness.
Open interest: market commitment gauge.
Higher volume = better fills.
Rising OI + price up = bullish.
Falling OI + price down = bearish.
Use alongside technical analysis, not in isolation.
Volume and open interest are solid indicators, but don’t overthink them. High volume usually means more liquidity and tighter spreads, which is good for entries and exits. Open interest shows how many contracts are out there. Rising OI with price going up? Bullish. Falling OI as price drops? Bearish. I mainly use these to gauge overall market interest in a particular option. If volume and OI are low, be prepared for wider spreads and more slippage. They’re useful tools, but price action and your strategy are still king. Don’t get bogged down in too many indicators. Keep it simple, manage your risk, and you’ll do fine.
I trade mostly 1-minute expiries. High volume narrows spreads, easier to get in and out. Low OI? Watch out for slippage.