Interpreting Option Open Interest and Volume in Pricing and Forecasts

Summary

The document asks whether option open interest and trading-volume changes can be incorporated into pricing models or used to forecast asset prices. It connects the question to supply and demand, implied volatility, option Greeks, and trader commitment, drawing an analogy to positioning data in futures. It also suggests that large changes in activity at out-of-the-money strikes might signal expectations of a substantial move or its direction.

These are hypotheses posed for discussion, not established conclusions: the document supplies no model, data, or empirical evidence. Open interest counts outstanding contracts, while volume records trading activity; neither alone identifies whether trades opened or closed positions, which side initiated them, or whether the activity reflects a directional view. Implied volatility reflects option prices and embeds market pricing of uncertainty, but it does not directly measure commitment. Any forecasting use would need to account for trade direction, hedging, liquidity, and other explanations, then test predictive value against a benchmark.

Key ideas

• The document asks whether changes in option open interest and volume can inform pricing or asset-price forecasts.
• It proposes that activity at out-of-the-money strikes may reveal expectations of large moves or direction.
• Open interest and volume alone do not identify traders’ positions or the direction of their views.
• The document presents no mathematical model or empirical test of its proposed signals.

Tags

# How to consider open interest & volume change in option pricing?


# How to consider open interest & volume change in option pricing?












Is there publically available option pricing model or theory that considers open interest/volume % change?

I believe that laws of supply and demand effect options like any tradable good. However, I have a hard time finding mathematical model showing the relationship between classic Greeks and open interest and options volume % change.

Ultimately if someone sells/buys option far in the money or out of money it will affect IV which then moves the option price, IV isn't the mesuring size of the commitment am I correct?

I would like to predict changes in asset prices based on changes in traders commitment (similar to futures COT). Let's say we have huge surge open interest in out of the money puts or calls we can draw a concussion that market thinks asset price going to make a large move. Based wherein the option chain volume changes we should be able to predict the direction as well.

Is there an existing theory around this?

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.