Understanding Open Interest and Volume in the Option Chain

In the cash market, you can analyse the price trend and volume levels to understand the trend of the market or sentiment of the traders. While in the options market, the scenario is different, here the trading volume and the number of trades are determined through the open interest which is a combination of all open contracts traded between the buyers and sellers at the end of the day.

Open interest (OI) and volume are two important aspects that you can see in the option chain. However Understanding  changes in OI can be challenging for some, but it gives very useful insights into trading activity for a particular underlying security, which you can use in your trading strategy. Here we are going to discuss about the open interest and volume in the option chain.

What is Open Interest in Option Chain?

Open interest or OI represents the total number of outstanding contracts in options or futures between the two parties – buyer and seller that are active and counted at the end of each trading day. The contract in OI shows the number of contracts still open, neither they are expired nor exercised. Daily new contracts are added and existing contracts are closed, causing the daily changes in OI.

However, when a fresh position is created the OI keeps increasing but only the existing position remains constant. OI starts decreasing when existing positions are closed or exercised. OI keeps changing every day with the change in the price of underlying security whether it is index option or stock option.

Recommended Read: What is Open Interest in Share Market?

What is Volume in Option Chain?

Volume in the option chain is the total number of contracts traded (that includes both buying and selling) during a single trading day. Every time when a contract is bought and sold, the trading volume keeps changing on a daily basis. Volume is considered an important factor to know the liquidity in the market.

High volume means the option is liquid making it easier to enter and exit from such contracts. Low volume means low liquidity in the contract, making it difficult to enter and exit from the trade positions.

How to Read Open Interest in Option Chain?

To read the OI in the option chain you need to look at the contracts for a particular strike price and type-either put or call. OI shows the total number of contracts that are currently open and active in the market for that strike price. OI varies across different contract types and strike prices, depending on how many positions remain open.

In the derivatives market, the total number of contracts traded during the day is called volume. To understand this better, when a seller sells a contract to a buyer, it counts as one traded contract and adds to the volume for the day. However, while reading OI in the option chain, make sure the number of contracts is both future and option. You can check the trading details of a particular underlying security of a particular strike price.

Recommended Read: How do you read option chain?

What is the Change in OI in the Option Chain?

In the option chain, OI is shown for calls and puts at different strike prices for an underlying security. The change in OI means the number of contracts increased due to the addition of new contracts that also affect the price of the underlying security.

On the other hand, a decrease in IO in the option chain means existing contracts are either closed, expired or exercised. Meanwhile, new contracts were added and old contracts closed. However, a change in the OI with the change in the price of an underlying security shows the sentiment of traders towards that particular underlying security. The change in OI translates a change in the volume of trades.

Open Interest Volume Price Relationship

To understand the relationship between OI, volume and price in the option chain you need to understand the relationship between changes in OI with changes in price. There are various scenarios when OI changes with price change indicating a particular trend in the underlying security.

OI and Price both Increase: When OI increases and the price of the underlying security also moves upwards, it is giving a bullish signal in the underlying indicating an upwards movement in the same.  

OI Decreases but Price Increases: When OI decreases but the price of the underlying security increases it means there is a bullish trend but also a chance of trend reversal with the possibility of a bearish trend.

OI Increase but Price Decreases: When OI increases but the price of the underlying security or index decreases it shows, a bearish trend with the possibility of panic selling in the market.  

OI and Price both Decreases: When both the OI and price of the underlying security decrease, it shows, that the market sentiment is bearish, as huge selling in the market reduces the number of contracts.

Importance of Volume in Option Chain

Understanding the volume in the option chain is very important to analyse the price volume open interest. Volume plays an important role in the option chain to show various indications that traders can use to trade. To understand the importance of volume find out how it is used in option trading.

Gauge the Liquidity: The level of volume not only in the option chain but also in any type of financial or non-financial instrument indicates the liquidity level. High volume means high liquidity in the market and low volume indicates low liquidity in the market or in the option chain of a particular underlying asset.         

Sentiment of Traders: The volume in the option chain is also used to measure the sentiment of the traders in the market. Unexpected volume increment means the new trend is likely to start while decreasing volume means there is a chance of trend reversal or likely end of the current trend.

Volatility Level: A rapid change in the volume of trading in the option chain means there is volatility in the market. This kind of volatility in volume comes when unexpected news comes into the market encouraging a large number of buyers and sellers to jump into the market which also makes the price volatile.

Market Trend: A new trend with a surge in volume can be used as confirmation of a trend with stability. An increase in volume with an increase in price confirms the upward trend, while a decrease in the price with an increase in the volume shows there is a bearish trend in the market or underlying security.

Strategy Selection: Based on the level of volume in the option chain, you can choose the right strike price and contract for your option strategy. A contract or strike price from an option chain with significant volume is important to easily enter or exit from any trade position to make your trading strategy successful.

Price Discovery: Analysis of volume in the option chain is also used for price discovery, as there are a number of participants in the market and all the information available to them. The change in volume also leads to a change in the price of underlying security as per the demand and supply in the market.

Recommended Read: How to place a trade using option chain?

Summing-up  

Open interest in the option chain is the total number of outstanding contracts at a particular point of time usually at the end of the trading session. These contracts are either active, not expired or not exercised showing the open trade positions in the market. Volume in the option chain means the total number of traded contracts at the end of the day, that includes buying and selling of contracts.

Change in OI with price change shows a particular trend or possibility of trend reversal. While the combination of change in OI with change in price and volume shows the market volatility, liquidity and sentiment of the traders. Understanding OI and volume in the option chain and their relationship will help you choose the right strike price or contract to improve the profitability of your options strategy.

• Author: Religare Broking
• Last Updated: September 8, 2025