Open Interest vs Volume for Stock Options

Question

Wanted to double check my intuition - What if there is only one trading day and the volume is smaller than the open interest on that one trading day. This is assuming there is no open interest before that day. Open interest cannot be larger than the volume traded. If it were then there is a miscalculation.

Answer 1

What if there is only one trading day and the volume is smaller than the open interest on that one trading day. This is assuming there is no open interest before that day?

I pulled this from a comment. This can't happen. We have zero open interest on day one. On day 2, I buy 10 contracts. Volume is 10 and now open interest is also 10. Tomorrow, if I don't sell, open interest starts at 10 and will rise by whatever new contracts are traded.

This is an example. I removed the stock name. This happens to be the Jan'17 expiration. The 10 contract traded on the $3 strike happen to be mine. You can see how open interest is cumulative, representing all outstanding contracts. It's obvious to me the shares traded as high as $5 at some point which created the interest (i.e. the desire) to trade this strike. Most activity tends to occur near the current price.

Answer 2

You are asking 'what if', do you have some anticipated answers? Having volume smaller than open interest is the norm. As far as I can tell, having only one trading day and no previous open interest only affects someone trying to sell a contract they are holding.

Meaning that if you only have one day to sell your contract then you need to offer it 'at market' or at the bid price (or even lower than the bid price). If you cannot sell your contract then you have to let it expire worthless or you have to exercise it. Those are your three options: let it expire, sell it (perhaps at a loss), and exercise it.

Edit: be careful about holding an in-the-money option. Many brokers will automatically exercise an in-the-money contract if you hold it till expiration date.

Answer 3

For stock options, where I'm used to seeing these terms: Volume is usually reported per day, whereas open interest is cumulative. In addition, some volume closes positions and some opens positions. For example, if I am long one contract and sell it to someone who was short one contract, then that adds to volume and reduces open interest. If I hold no contracts and sell (creating a short position) to someone who also had no contracts, then I add to volume and I increase open interest.

EDIT: With the clarification in your comment, then I would say some people opened and closed positions in that one day. Their opening and closing trades both contribute to "volume" but they have not net position in the "open interest."