Difference Between Open Interest and Volume
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Comparative Table – Open Interest vs Volume
What is Open Interest?
Open interest is a measure of market activities or participation. It is defined as the number of active futures and options contractsOptions ContractsAn option contract provides the option holder the right to buy or sell the underlying asset on a specific date at a prespecified price. In contrast, the seller or writer of the option has no choice but obligated to deliver or buy the underlying asset if the option is exercised.read more of any asset the traders and investors hold on an asset, any particular day.
An open interestOpen InterestOpen interest refers to the total outstanding or open contracts in a derivative market at any time. The quantitative value shows the total number of contracts that have yet to be liquidated in the market. It is frequently observed in conjunction with data from the futures and options markets.read more scales up by one contract if a new buyer and seller are willing to initiate a trade. If both of them are closing up on a trade, open interests scale down by one. Open interest is computed by adding all the positions held by market participants and subtracting them when they are closed or settled. Since this is a metric that quantifies the actively held contracts, the numerical value keeps changing every day with the addition and closure of new positions. An increase in open interest signals that the current market trend will continue to prevail, while a decline in the open interests suggests an end to the current price trend.
What is Volume?
Volume of tradeVolume Of TradeThe volume of trade is the overall measure of the number of securities, shares or contracts traded during a particular trading day. read more is defined as the sum of transactions on an underlying security that have been completed in a given time frame. Unlike open interest, which shows only the number of actively traded contracts, the volume shows every trade with opened or settled contracts in a time interval. In addition, the volume denotes the level of activity in the market. Thus an actively traded stock market represents a higher volume while a passively traded market represents a lower volume. When studied with the rise in prices, volumes can also measure the strength of the market.
Volumes are usually the closest proxy to the liquidity of a traded security. If there is more interest among market participants for a particular security or derivativeDerivativeDerivatives in finance are financial instruments that derive their value from the value of the underlying asset. The underlying asset can be bonds, stocks, currency, commodities, etc. The four types of derivatives are - Option contracts, Future derivatives contracts, Swaps, Forward derivative contracts. read more, it would naturally lead to more trades and better price discovery. Hence a greater volume indicates larger liquidity. It makes the market more efficient and allows a trade exit to be far less of a hassle since there is always a buyer or a seller for the security. Stock exchangesStock ExchangesStock exchange refers to a market that facilitates the buying and selling of listed securities such as public company stocks, exchange-traded funds, debt instruments, options, etc., as per the standard regulations and guidelines—for instance, NYSE and NASDAQ.read more regularly publish the volume information so that traders can get an idea about the number of shares that are in motion. Many news websites, online trading platforms, and mobile applications also make the data accessible to the common traders. Trade volume graphs can vary depending on the time period one looks into.
Open Interest vs Volume
Similarities
Analysts and traders usually use open interest and volume in tandem or individually to check the strength of a moving trend. For example, let’s say that the prices rise along with an increase in open interest and volume. This usually signifies that the trend is strong and is likely to sustain its forward movement. Moreover, it implies potential trading opportunities. It tells that traders not only have an interest in a certain contract but would also back it up with their money.
But, if the prices are on an upward trend but volumes and open interest are not, it weakens the movement. It may hint at a future price consolidation or stagnation until a breakout happens.
The volume value is reset to zero at the start of every other day. But the open interest always remains higher than the volume. Therefore, when the volume is higher than open interests, it indicates a very high level of trading that day.
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