Been looking at volume and open interest data for my options trades but not sure how to read them properly.
Volume seems straightforward but open interest confuses me. Sometimes high volume with low open interest, other times it’s opposite.
How do you guys use these numbers when picking trades? Made some bad calls recently ignoring this data.
Open interest tells you if new positions are being created or old ones are closing. When both volume and open interest rise, new money is coming in, which means the price move should continue.
The tricky part happens when volume spikes but open interest stays flat or drops. This usually means existing traders are swapping positions instead of bringing in new conviction.
Combining these with price action tends to work better than using them alone. High open interest levels can also act as support or resistance.
Back when I was making terrible option picks, I completely ignored open interest until one massive loss taught me the hard way.
Now I check if open interest is building at key strike prices. Heavy open interest often becomes a magnet where price gets pulled.
Last month I spotted huge open interest at 4300 on SPY puts and watched price slam right into that level twice.
Low open interest with high volume often signals traders are taking quick profits.
Volume shows current trading activity while open interest tracks how many contracts are still open. High volume with low open interest usually means people are closing positions fast, which could signal a trend reversal coming. High open interest with steady volume means traders are holding their positions, showing conviction in the current direction.
I watch for volume spikes above average combined with rising open interest. That tells me new money is entering and the move has legs. When volume stays high but open interest drops, that’s often a warning the trend is losing steam.
Don’t overthink it though. These are supporting indicators, not magic signals. Your entry and exit strategy matters more than perfect volume analysis.
Filter options with OI above 1000 contracts first. Volume to OI ratio above 2:1 indicates active interest. Below 0.5:1 means stale positions. Use these thresholds to avoid illiquid traps.