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Jan 10, 2022
Open interest and volume are two indicators used in the financial market for the analysis. It describes the activity and liquidity of available and future contracts.
Open interest reflects the contracts that are open for traders and investors to have their positions. Volumes are traded on a particular day. We can predict the future price trend by analyzing open interest and volume together.
Before understanding open interest and volume, we need first to understand the contracts of options and futures.
Since volume and open interest are most useful in options and futures trading, let us know what it means.
An option is a contract where one party has a chance to execute the trade in the future. Whereas, Future is simply an agreement to buy or sell something at a price agreed upon today.
The value of it is determined and used in trading. These allow traders to buy or sell securities, such as stocks or commodities at a predetermined price or on a predetermined date.
Open Interest is the number of balances for future and option contracts. For Options, every strike price of a contract has an individual open interest value.
Open interest is also defined as the number of Options contracts still open and held by traders and investors. These options have not been closed out, expired, or exercised.
Open interest serves as a measure of the trading for the asset and shows whether capital into option and future market is increasing or not. The advantage of open interest is, it reflects higher liquidity for the contract served.
High open interest for a contract means it reflects how many people are interested in the contract. Unlike trading volume, open interest is updated less frequently at just once per day.
Volume is the shares that are traded, whether while buying or selling at a trading period, i.e., within a specified set period. Volume denotes the number of securities that are either bought or sold.
Volume means the number of shares or stocks that exchanged hands of buyers and sellers in the markets on that particular day.
For example, a company named XYZ bought 200 shares, then sold all shares, then re-bought and then re-sold again, resulting in four transactions, then the volume would be 800 shares even though the same 200 shares may have been multiple times. Entry and exit into the high-volume shares are comparatively easy than the entry and exit into the low-volume shares in the market. Therefore, high-volume claims offer higher liquidity, and low-volume shares offer liquidity levels.Trading volume can help investors in identifying the momentum in security that confirms a trend. If trading volume increases, prices generally move in the same direction. If security continues higher in an uptrend, the volume of the security should also increase and vice versa.
Volume trading gives investors a close idea of the price of a security, whether to buy or sell. The most effective method of using this indicator is to focus on the average daily trading volume figures of security.
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While, in the end, we have come to the point where we know open interest and volume are both key indicators of the financial market, and both thoroughly matter in trading.
While simultaneously increasing open interest and volume, the direction of the trend price movements is likely to remain unchanged. However, the decline in volume and open interest signals the end of the current trend.
Q: Why do open interest and trading volume matter to options traders?
A: Open interest also gives you essential knowledge specific to the liquidity of an option. Suppose there is no open interest in an option, then there will be no secondary market for that option.
When options have a particular open interest, it means there are many buyers and sellers out there.
Q: How do open interest and volume relate?
A: Open interest is the number of open contracts or traders and investors have their positions. We predict the future price by analyzing the open interest and volume together.
Q: Should volume be higher than open interest?
When the volume exceeds the existing open interest for a given period, it means trading in that option was exceptionally high that day.
Q: What does high open interest low volume mean?
If volume and open interest fall, the theory behind the momentum is slowing, and the direction of prices will soon reverse.
Axis Direct is a brand under which Axis Securities Limited offers its retail broking and investment services. Investments in the securities market are subject to market risks. Read all the related documents carefully before investing. This information is only for consumption by the client and such material should not be redistributed.Disclaimer & Statutory Information
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