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# Understanding Option Volume and Open Interest

In this blog we will look at the relationship between Option Volume and Open Interest. Stocks floats by design are finite in nature. A company for example may have a float of 500M (this number can change if a company does secondary offering or does a buy back and retire shares, however, this isn't something that changes on daily basis). Options on the other hand can be created out of thin air. There is no limit to the number of contracts that can be open irrespective of the stock float. On all platforms you will see option Greek and alongside Option Volume and Open Interest. What exactly is the relationship between the two? On any day you will see the option volume to be increasing but the Open Interest remains the same. The changes in the Open Interest are reflected the next day. If the Option Volume is 1000 and Open Interest is 10,000 and next day the Open interest is 11,000 then 1000 new contracts were created, on the other hand if the Open Interest is 9000 then 1000 contracts were closed. However, if the Open Interest stays the same it implies the contracts were simply transferred from one party to another. In all likelihood it's a combination of the 3 scenarios. The below paragraph explains the 3 distinct possibilities on how changes in Open Interest are reflected.

• Day 1 Stock "XYZ" for strike 50 Open Interest is 500

• User A "Buys to open 10 contracts" User B "Sells to open 10 contracts", this will create 10 new contracts (They are not double counted)

• Volume Day 1 is 10 and Open Interest is 500

• Day 2. Since 10 new contracts were created the Open Interest is now 510

• User A "Sells to close 5 contracts and User B "Buys to Close 5 contracts"

• Volume Day 2 is 5 contracts that are closed and Open Interest stays at 510

• Day 3. Open Interest is now 505 (since 5 contracts were closed)

• User A "Sells to close 5 contracts" and User C "Buys to open 5 Contracts

• In this case "There will be no change in Open Interest since the contracts from User A are being transferred to User C

• Volume will reflect 5 Contracts

• Day 4 Open Interest is Unchanged at 505