Volume vs. Open Interest

Is it an Opening or Closing Trade?

Volume and the size of the trade is clearly important when evaluating Options Flow as we look for Opening Buyers. The larger the volume the more likely that a top institutional player is involved.

But, it’s equally important to analyze the relationship between Volume and the Open Interest.

Many experts teach that if the Volume is greater than the OI, then this was an Opening trade.

Unfortunately, this is not always true.

Tools - Volume vs Open Interest top

The One and Only Time

The only time you can be 100% sure that the options flow was an Opening Trade is with "0" Open Interest (or close to it). But, there are times you can make higher confident conclusions.

When analyzing an options order, if the Size of the trade is larger than the Open Interest plus any volume that happened today before that trade, then it is an opening trade.

Size of the Options Trade   >    Open Interest + any prior Volume today

For example, there is 4,000 Open Interest. At 10am, 10,000 contracts trade with no other volume before that. Those 10,000 are going to be an opening trade.

Conversely, if 7,000 trade in the morning and then 10,000 traded in the afternoon, it is unclear if the 10,000 is opening or closing. I could have been long 3,000 (of the 4,000 Open Interest) calls and added 7,000 more Calls to get me to 10,000. Then later that day, I decide to sell the 10,000 contracts to close the position.

A Real Example

On the Stock page of the OptionsGeek Tools there is a data set that offers the "Top Individual Trades" in a specific stock sorted by “Size.”  In the AAPL example below, notice the top 9 options trades in AAPL. Can you tell me which options were Opening trades?

Tools - Volume vs Open Interest

If you check for the Size of the trade to be greater than the Open Interest, then there are only 4 trades that qualify.

1.)  7,079 19-Aug-22 $145 Puts $8.80 vs 6,741 Open Interest.
2.)  6,729 19-Aug-22 $145 Puts $9.19 vs 6,741 Open Interest.
3.)  4,000 27-May-22 $146 Puts $0.03 vs 2,011 Open Interest.
4.)  3,761 27-May-22 $146 Puts $0.14 vs 2,011 Open Interest.

Were all these Opening Trades?

Let me add in the time of the trade and (volume) at the time of the trade:

1.)  7,079 19-Aug-22 $145 Puts $8.80 (16,024) vs 6,741 Open Interest…  10:00:53
2.)  6,729 19-Aug-22 $145 Puts $9.19 (6,759) vs 6,741 Open Interest…   9:46:35
3.)  4,000 27-May-22 $146 Puts $0.03 (62,652) vs 2,011 Open Interest…  13:20:02
4.)  3,761 27-May-22 $146 Puts $0.14 (44,853) vs 2,011 Open Interest…  11:25:21

Now, all four were traded on the bid or below the bid, which indicates a sale.

#1 or #2 (or both) looks to be an opening trade, but we can’t be 100% certain.

Because they traded 14 minutes apart and both below the bid, I think they were going in the same direction. It appears that both were sold to open. That's my conclusion with high confidence.

#3 and #4 could both have been bought during the day in smaller chunks and then sold to close midday. So, that is also uncertain.

Conclusion

Knowing how to analyze Volume vs Open Interest is an important skill that should not be underestimated.

It does take some practice.

And don't expect to get clear answers every time. You'll quickly learn which ones are easier to gain confidence in your answer and which ones will be inconclusive.

For example, I tend to stay away from the options that have significant Total volumes during the day (Total volume above 400,000 options) because they will generally not give me high-confident answers. I'm drawn to the large prints in names that are not so heavily traded where the answer is much easier to understand.

Tools - Volume vs Open Interest top

Volume vs. Open Interest

Is it an Opening or Closing Trade?

Volume and the size of the trade is clearly important when evaluating Options Flow as we look for Opening Buyers. The larger the volume the more likely that a top institutional player is involved.

But, it’s equally important to analyze the relationship between Volume and the Open Interest.

Many experts teach that if the Volume is greater than the OI, then this was an Opening trade.

Unfortunately, this is not always true.

The One and Only Time

The only time you can be 100% sure that the options flow was an Opening Trade is with "0" Open Interest (or close to it). But, there are times you can make higher confident conclusions.

When analyzing an options order, if the Size of the trade is larger than the Open Interest plus any volume that happened today before that trade, then it is an opening trade.

Size of the Options Trade
>    Open Interest
+ any prior Volume today

For example, there is 4,000 Open Interest. At 10am, 10,000 contracts trade with no other volume before that. Those 10,000 are going to be an opening trade.

Conversely, if 7,000 trade in the morning and then 10,000 traded in the afternoon, it is unclear if the 10,000 is opening or closing. I could have been long 3,000 (of the 4,000 Open Interest) calls and added 7,000 more Calls to get me to 10,000. Then later that day, I decide to sell the 10,000 contracts to close the position.

A Real Example

On the Stock page of the OptionsGeek Tools there is a data set that offers the "Top Individual Trades" in a specific stock sorted by “Size.”  In the AAPL example below, notice the top 9 options trades in AAPL. Can you tell me which options were Opening trades?

Tools - Volume vs Open Interest

If you check for the Size of the trade to be greater than the Open Interest, then there are only 4 trades that qualify.

1.)  7,079 19-Aug-22 $145 Puts $8.80 vs 6,741 Open Interest.
2.)  6,729 19-Aug-22 $145 Puts $9.19 vs 6,741 Open Interest.
3.)  4,000 27-May-22 $146 Puts $0.03 vs 2,011 Open Interest.
4.)  3,761 27-May-22 $146 Puts $0.14 vs 2,011 Open Interest.

Were all these Opening Trades?

Let me add in the time of the trade and (volume) at the time of the trade:

1.)  7,079 19-Aug-22 $145 Puts $8.80 (16,024) vs 6,741 Open Interest…  10:00:53
2.)  6,729 19-Aug-22 $145 Puts $9.19 (6,759) vs 6,741 Open Interest…   9:46:35
3.)  4,000 27-May-22 $146 Puts $0.03 (62,652) vs 2,011 Open Interest…  13:20:02
4.)  3,761 27-May-22 $146 Puts $0.14 (44,853) vs 2,011 Open Interest…  11:25:21

Now, all four were traded on the bid or below the bid, which indicates a sale.

#1 or #2 (or both) looks to be an opening trade, but we can’t be 100% certain.

Because they traded 14 minutes apart and both below the bid, I think they were going in the same direction. It appears that both were sold to open. That's my conclusion with high confidence.

#3 and #4 could both have been bought during the day in smaller chunks and then sold to close midday. So, that is also uncertain.

Conclusion

Knowing how to analyze Volume vs Open Interest is an important skill that should not be underestimated.

It does take some practice.

And don't expect to get clear answers every time. You'll quickly learn which ones are easier to gain confidence in your answer and which ones will be inconclusive.

For example, I tend to stay away from the options that have significant Total volumes during the day (Total volume above 400,000 options) because they will generally not give me high-confident answers. I'm drawn to the large prints in names that are not so heavily traded where the answer is much easier to understand.

In the next article, I will show you a way to double check your analysis..