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The following is the Option Chain for the symbol UBER.

There is a high Interest for 40 CALL. There is less interest for 40 PUT.

My questions are:

  1. What is the difference between VOLUME and OPEN INTEREST?
  2. Buying and selling of stocks have impact to the price of the stock. Similarly, do the Open Interest or Volume have any impact to the price of the stock? In this case, because of the large interest of the $40 calls, the price will stay higher than $40?

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Open Interest (not Option Interest) represents the number of contracts that exist on any given day.

In order for a trade to occur, there must be a buyer and a seller. Each party may be opening or closing the contract. There are 4 scenarios:

Buy to Open (BTO) and Sell To Open (STO)

  • Both parties are initiating a new position (one new buyer and one new seller) so open interest increases by one

BTO and Sell To Close (STC)

  • If a contract owner sells to a new trader, open interest does not change (an existing contract is changing hands)

Buy To Close (BTC) and STO

  • If someone short a contract buys from a new writer, open interest does not change (an existing contract is changing hands)

BTC and STC

  • Both parties are closing an existing position (one previous buyer and one previous seller) so open interest declines by one

A call buyer is bullish. If that call purchase is to hedge a short position in the underlying, the trader is actually bearish. Therefore, there's no way to infer what an investor's directional bias is from call (or put) purchases and possible changes in open interest. To that end, some delve into combining price, volume and open interest to determine direction. I've never been able to discern it but here's an article from Investopedia that explains it.

In general, option pricing follows stock price. Stock price can follow option price but those are nuanced exceptions and tend to have little to no effect on share price unless it's a very illiquid stock.

For example, if option pricing strays from put/call parity, a market maker or floor trader will execute a conversion or a reversal which leads to buying or selling of shares to drive option prices back in line.

Another example might be if a option owner exercises a large amount of options and the counter party(ies) have naked options and must cover the assignment. These are infrequent exceptions and they occur randomly.

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    I took the liberty of defining the acronyms since OP seems to not be familiar with aspects of option trading (e.g. Option Interest) so they may not be obvious.
    – D Stanley
    Feb 8, 2020 at 16:51
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    @D Stanley - Thanks for adding that info. Sometimes I forget that some of this is a foreign language to others.
    – Bob Baerker
    Feb 8, 2020 at 16:56
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Open interest information tells us how many contracts are open and live in the market. Volume on the other hand tells us how many trades were executed on the given day. For every 1 buy and 1 sell, volume adds up to 1. The volume counter starts from zero at the start of the day and increments as and when new trades occur. Hence the volume data always increases on an intra-day basis. However, OI is not discrete like volumes, OI stacks up or reduces based on the entry and exit of traders.

The following tables summarizes the trader’s perspective with respect to changes in volume and prices –

Price       Volume      Trader’s Perception
Increase    Increase    Bullish
Decrease    Decrease    Bearish trend could probably end, expect reversal
Decrease    Increase    Bearish
Increase    Decrease    Bullish trend could probably end, expect reversal

The following tables summarizes the trader’s perspective with respect to changes in the OI and prices –

Price       OI          Trader’s Perception
Increase    Increase    More trades on the long side
Decrease    Decrease    Longs are covering their position, also called long unwinding
Decrease    Increase    More trades on the short side
Increase    Decrease    Shorts are covering their position, also called short covering

Key

Open Interest (OI) is a number that tells you how many contracts are currently outstanding (open) in the market

OI increases when new contracts are added. OI decreases when contracts are squared off

OI does not change when there is transfer of contracts from one party to another

Unlike volumes, OI is continuous data

On a stand along basis OI and Volume information does not convey information, hence it makes sense to always pair it with the price to understand the impact of their respective variation

Abnormally high OI indicates high leverage, beware of such situations.
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  • In the actual market, you'll find that these Trader Perceptions of Price and Open Interest are unreliable.
    – Bob Baerker
    Feb 8, 2020 at 19:48

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