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Volume Vs Open Interest - How and What about Futures and Option Trading

Volume and Open Interest are the thermometers that help us measure the heat of the liquidity in the Future and Option contracts. Liquidity is the market characteristic that describes the depth in the interest of buying and selling of a particular stock. In other words, you can term it as the degree of market participants. Higher Volume and Open Interest indicate higher participants in the market.

Volumes simply indicate how many shares are bought and sold in a given period. An active share relatively has a higher volume. One can see the volume as an indicator of showing the strength of a particular movement in the stock. Also for the traders point of view, it gives them liquidity for buying and selling the stock quickly. If anyone trades in less active or less liquid stock, he may be stuck with the trade as he may not get buyers or sellers for his trade.

  • Volume has a tendency to increase on the bull run and decrease on rejection
  • In a bear market, volume increases on declines, and decrease on a rally.
  • Volume increase drastically, at the support and resistance of a stock.

One can depict high, low and average volume in this way,

High Volume = Today’s volume > last 20 days average volume
Low Volume = Today’s volume < last 20 days average volume
Average Volume = Today’s volume = last 20 days average volume

You can use 20 days moving averages on the volume. If volume is crossing up that 20 days moving averages, indicate the high volume.

Open Interest
The Open Interest indicates the number of open contracts in the market. It simply tells how many future and option contracts is yet to close in the market. The open interest gives you an important data about the liquidity of an option contract as well as the future contracts. If there is no interest open in the option contract, there is no participation for that option in the market. If you can spot a significant open interest in an option contract, this indicates a large number of buyers and sellers are there for it. Higher open interest may fetch, higher premium for you.
Credit: Telegram Bot:

For examples, if you check the above image that helps you visualize the open interest of Reliance. Check the strike price 1500 where you can see the call open interest around 12 lakh and put open interest around 13 lakh. That gives you a combined open interest more than 25 lakh. That indicates more than 25 lakh contracts are open in the market at that strike. This also ensures about the liquidity of the option strike.

On the other hand, if you check the strike 1660 which has relatively low open interest so less liquid than that of 1600.

Volume Vs Open Interest
As we discussed above, The OI tells us how many contracts are yet to close in the market whereas volume, on the other hand, tells you how many trades were executed on a particular day. For every 1 buy and 1 sell, there will be 1 volume. For example, if there is
1000 contracts bought + 1000 Contracts sold = 1000 volume generated.

In case of OI, if you
Buy 100 contract = 100 OI generated (Yet to sell)
Sell 100 contract = 100 OI generated (Yet to buy)
In this case, we will have 200 Open Interest.

Now, if you sell your 100 contracts that you have bought earlier, you will close 100 open interest. Still, you have 100 sell contracts open, which still indicates 100 Open Interest. Now, if you buy this 100 contracts, that you have sold earlier, will close your 100 open interest.  In other words, the closed open interest can be termed as the volume. You can learn more about Open Interest over here.

Open Interest is a continuous data whereas Volume is discrete. We have the total number of Open Interest in which subtraction or addition keeps happen in Open Interest based on OI generation and closing whereas the Volume counter starts each day. What I want to say is the open interest counter starts with the opening of the series thus there is only one counter for entire series. If there are 22 trading days in a series then you will have 22 different counters for volume that makes it discrete.

Volume, Open Interest and Market Sentiments
Today’s volume is meaningless on tomorrow’s volume. However, Open Interest has implications as it is continuous. Discrete volume and continuous OI, both are useless, if you check them stand-alone. However, for great insights, one can combine them with price and infer the draw-lines as follow:

Strength Weakening
Weakness Weakening

Bottom Line
Whenever you want to check the sentiment of the market, you should look volume and OI concerning price change, else they won’t give you any meaningful insights. Futures and options have different OI and Volume, so you can check them differently. However, the function is the same whether in future or option.

Recommended Read:

Volume Vs Open Interest - How and What about Futures and Option Trading Reviewed by Kumar Chandan on May 09, 2020 Rating: 5

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