Introductory Context
"Volume is the number of contracts traded in the current session — resets to zero every day. Open interest is the number of outstanding contracts not yet closed — accumulates over multiple sessions. Volume measures activity today; OI measures committed positions over time. Together they reveal whether activity is building new positions or rotating existing ones. "
The Definitions Side by Side
Volume
Volume is the total number of contracts traded in the current session (or since the last data snapshot). It measures how many times a specific contract changed hands today. Volume resets to zero at the start of each new trading session. A contract traded 10 times between 10 different traders counts as 10 in volume.
Open Interest
Open interest is the total number of open (outstanding) contracts that exist at this moment across all participants. It measures how many contracts have been created and not yet closed. OI does not reset daily — it accumulates and changes only when new positions are opened (OI increases) or existing positions are closed (OI decreases). The same contract traded 10 times between 10 different traders adds only net 0 to OI if each trade is between an opening and a closing participant.
The Three Possible OI Changes from Any Transaction
(1) Buyer opens, Seller opens: both creating new positions. OI increases by 1. (2) Buyer opens, Seller closes: buyer creating new position, seller closing existing. OI is unchanged. (3) Buyer closes, Seller closes: both closing existing positions. OI decreases by 1. High volume days with flat OI = scenario 2 is dominant (positions passing between participants without net creation). High volume days with rising OI = scenario 1 is dominant (new positions being built).
When to Use Volume vs When to Use OI
Use Volume For:
• Identifying the day's most actively traded strikes — high volume suggests active interest and typically tighter bid-ask spreads for execution
• Confirming that a price move has participation — a breakout on high volume is more credible than a breakout on thin volume
• Identifying unusual activity at specific strikes — a spike in volume on an otherwise quiet strike can signal informed trading ahead of news or events
Use OI For:
• Identifying the most important support and resistance levels — max OI strikes represent the largest committed positions
• Confirming the direction of a price move — rising OI confirms conviction, falling OI suggests the move may be fading
• Assessing market sentiment over time — the PCR (put-call ratio) is OI-based, not volume-based
• Tracking the weekly OI build as expiry approaches — understanding how OI evolves from Monday to Thursday
The Practical Application — A Specific Example
Consider two scenarios for the Nifty 24,500 CE on the same day:
Scenario A: High Volume, Rising OI
24,500 CE sees 5 lakh contracts in volume today. OI rises from 20 lakh to 25 lakh. Interpretation: new positions are being aggressively built at this strike. Participants who traded today were mostly opening new positions, not rotating existing ones. The interest at 24,500 CE is growing — potentially significant.
Scenario B: High Volume, Flat OI
24,500 CE also sees 5 lakh contracts in volume today. OI stays flat at 20 lakh. Interpretation: the same number of contracts changed hands today but existing positions were passing between participants (old buyers selling to new buyers, or old sellers buying back and new sellers entering simultaneously). The aggregate committed positions at this strike did not change. The activity was rotation, not buildup.
The implication for trading: Scenario A provides a stronger signal that this strike is gaining significance. Scenario B suggests active interest today but no net increase in conviction at the level.
Volume as the First Screen, OI as the Second
In practice, use volume to quickly identify which strikes are actively traded today — these will have the tightest spreads and best execution quality. Then use OI on those active strikes to understand whether the activity is building new commitment or rotating existing positions. This two-step approach focuses your analysis on the most relevant parts of the chain without requiring you to analyse all 40–60 rows simultaneously.
Unusual Volume — The Pre-Event Signal
One of the most watched signals in options trading is unusual volume — a spike in volume at a specific strike that is far above normal activity. This can signal informed trading ahead of a corporate event (earnings, M&A) or ahead of a macro event (Budget, RBI meeting) where specific participants have positioned before the information is public.
On the Nifty chain, unusual volume at OTM strikes — particularly in the days before scheduled events — is watched carefully by experienced traders as a potential early signal of expected large moves. A spike in 24,800 CE volume 3 days before the Budget, if far above normal activity at that strike, suggests participants are positioning for a significant Nifty rally post-Budget.
Volume is the newspaper headline — it tells you something happened today and roughly how big it was. Open interest is the library record — it tells you everything that has accumulated over weeks and what is still on the books. Both have their uses. Neither is sufficient alone. Traders who read only volume miss the strategic picture that OI provides. Traders who read only OI miss the day's activity signals that volume provides. The complete picture uses both.