"Options With Traded Volume But No Open Interest?"

Question By Allen

"Options With Traded Volume But No Open Interest?"

Why is it that there are some options with traded volume but no open interest? How can options that has no open interest be traded?

Asked on 17 Aug 2010

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Answered by Mr. OppiE

Hi Allen,

Indeed, it is more common to look into an options chain and find options with no trading volume but some open interest rather than options with some trading volume but zero open interest.

What does it mean when an options contract has some trading volume but no open interest?

Open interest is a running account of the contracts still outstanding in the market. Outstanding contracts means contracts that were opened and still held by the one who initiated the opening. For instance, if you buy to open or sell to open one contract, open interest for that contract increases by 1 and trading volume increases by 1 for the day as well. Open interest reduces when an outstanding contract is closed through a buy to close or sell to close order but trading volume would still increase for the day due to the trade that took place.

As such, it is possible for an options contract to have trading volume but no open interest when all the outstanding contracts for an option is closed in one day. This typically happens for options contracts that are not heavily traded and is probably traded by only one market participant so far. For instance, if you bought 10 new options contracts with zero trading volume and zero open interest, trading volume increases by 10 and open interest increases by 10 for the day. Some days later, you realised that you are still the only one trading that particular options contract and decided to close out the position by selling to close those 10 contracts. As such, trading volume for that day would go up to 10 but the open interest would decrease by 10 all the way down to zero.

In conclusion, options contracts can have some trading volume and yet no open interest when it is a thinly traded contract which has closed out all of its outstanding contracts in a day.

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