#140 - How Can Options Have Traded Volume But No Open Interest?
Hey everyone, Kirk here again at Option Alpha and welcome back to the daily call. Today, we are answering the question, “How can options have traded volume, but no open interest?” This one is one that I think really trips people up and sometimes I even have to slow down and think about this when I see this because it catches you off guard when you see this and it’s not oftentimes in highly liquid securities. It’s more often in underlyings and securities that are thinly traded or have low liquidity. But you might be looking at your options pricing table and you see that there’s some volume for those contracts, but no open interest and this could be really the cause of one or two different things. That’s really what I want to talk about here today. The first thing you have to understand about open interest is that it really is just this running account of contracts that are still open in the market. If for instance, somebody buys to open or sells to open a contract in the open market, then open interest goes up by 1. There’s 1 now new contract created that somebody has basically entered into or between two different parties has been created and that also means that that one contract is increasing the trading volume for the day. Again, volume is the rotation or the frequency of trading and open interest is basically the depth of the market. That’s how I think about it. How deep is the market? How many contracts are out there? And volume is the frequency or the rotation of trading. And so, again, if you are a new trader and let’s say you’re trading something brand new and nobody else is trading it, you open a contract either to sell or to buy, you open that contract, open interest goes up by 1 and then trading volume goes up by 1. Well, you could actually then decide that same day that you want to close out that contract. And so, you close your contract, you buy to close, you sell to close, it doesn’t really matter. And so, volume goes up by 1 again because now, two contracts have been traded, they just happen to be your two contracts, but now, there’s no contracts remaining, so open interest goes back down to 0 because the same contract that you opened, you then closed. And so, this is a really interesting concept because it trips people up because they don’t quite know how to navigate this framework and really understand what happens. I think the key here is just understanding that just because open interest is 0 doesn't mean the contracts can’t be created or haven’t been created. In some cases for some of these thinly traded options, what happens is that you get into a situation where new contract months open up or new strike prices open up which can happen often all the time. If a stock is rallying really strong, they might open up some new strike prices that were not there before. And so, what you would see in our particular day is lots and lots of volume, but you may not see that open interest really show up until the next day. If those contracts are brand new or those strike prices are brand new, you might get a lot of volume, but the open interest and the total of the contracts remaining in some broker platforms may not show up until the next day. It seems like there's something wrong, but it’s just maybe a little bit of a lag in a system. The other time that you would see open interest at 0, but lots of volume like I said, is in thinly traded options. This is what I see all the time where people try to email in and they’re like, “Hey, look at this. I don’t know what’s going on. I can just see by the ticker symbol because I’ve never seen a ticker symbol before in my life that it’s probably some low liquidity options and there’s not that many people trading in it.” Although there might be a lot of volume, it’s just the same people opening and closing contracts back and forth with each other. Ultimately though, as an options trader, if you want to build this business to scale, you have to avoid markets that don't have any depth. And so, what I tell people all the time in training is that you have to go after markets and strike prices that have not only a lot of volume… And volume is a little bit subjective based on price and contract size, etcetera. But you have to go after things that have generally good volume, so lots of rotation, people actively trading and a lot depth. A lot of depth, meaning that there’s a lot of contracts there, there’s a big pool of buyers and sellers who are looking to engage in this contract. You take a look at just any regular symbol, any big ticker symbol like SPY or QQQ, IWM, you can see in those options chains, there’s hundreds of thousands of contracts that have open interest and volume. Then you take a ticker symbol maybe something else that's a much smaller company, a lower market cap that’s just starting to trade options and it’s very thinly traded, you see like 1s and 0s all over the place because really, nobody’s trading them. Avoid the thinly traded stuff, really focus on the highly liquid stuff and I don’t think you’ll actually have too much of an issue with open interest. Hopefully this helps answer your question. As always, if you guys have any other questions or want to hear different topics on the daily call, let me know. Shoot us an email, contact us on Twitter, Facebook, etcetera, leave us a private voicemail at optionalpha.com/ask, whatever you need to do to get your questions in here, so that we can get them answered for you. Until next time, happy trading!
