I have been trading options for a bit but still struggle with understanding volume and open interest.
I get that volume indicates how many contracts are traded daily, but open interest is harder to grasp.
Could someone explain the main differences? Which is more important for making trades?
Lost 400 bucks on SPY calls once because I ignored open interest completely. Big mistake.
Volume tells you how liquid the market is right now. Open interest shows you total commitment from all traders.
High volume with low open interest often means people are closing positions. That usually signals trend exhaustion in my experience.
Open interest basically tells you how many contracts are still active and haven’t been closed yet. Think of it like this - volume resets every day but open interest keeps building up.
When open interest is rising with price, it usually means the trend has strength behind it. If open interest drops while price moves, the trend might be weakening.
Both matter but I watch volume first for timing entries, then check open interest to see if there’s real conviction in the move.
Volume shows daily activity while open interest tracks total contracts still open. Check both but volume matters more for entry timing.
Key differences:
• Volume - contracts traded that day
• Open interest - total active contracts not yet closed
Rising open interest confirms trend strength. Declining signals weakness.
Both matter equally for position sizing.