Volume and open interest are measures of market activity that futures and options traders find useful for analyzing and anticipating price movements. Volume refers to the number of transactions carried out in a day. That is, the volume is the number of contracts that change hands in a single trading session. Open interest is the total number of contracts that have been bought but that have not expired and have not been exercised or settled. Traders use volume and open interest to estimate market liquidity and the strength or weakness of price trends.
1. Obtain the quote for the futures or options contract you in which are interested. Quotes are published by many daily newspapers — including the Wall Street Journal — and are also available on many financial websites.
2. Calculate the change in the number of open interest contracts by subtracting the open interest figure from the previous trading session from the number of open contracts at the close of the current day’s session. A positive change indicates an increase in the number of open contracts, so money is moving into the market. This is a confirming sign, meaning it is likely that the current price trend will continue. A decline in open interest contracts suggests a change in the current price trend is on the way.
3. Compare the volume of trading to that of recent trading sessions. Most financial websites offer displays of price and volume information in chart form. Trading volume that is relatively high indicates the security you are analyzing is liquid. That is, you should be able to sell contracts you hold quickly. You may also subtract the previous day’s volume from the current day’s volume. A positive number indicates increasing volume. Liquidity is important because you want to be able to sell a contract when you decide to close out your position. If the market is illiquid, you might not be able to find a buyer and therefore be stuck with a contract while the market price moves against you.
4. Compare volume to open interest. Volume for the day greater than the total open interest contracts indicates heavy trading and high liquidity.
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