In terms of option trading, volume is the number of option contracts traded in a given period of time.
This article will explain why volume is important and how volume gets its value. It is useful to understand what volume is in order to have success in options trading.
Every time an option holder buys an option contract from an option writer, then that generates a volume value of one. The value will accumulate with every purchase of the option contract until the end of the trading period. The next trading period will have a new volume value.
Volume is important because the more trades an option contract has, the more the price of that option contract will move.
A large percentage change in option price along with above-average volume is a good indication that the market is moving in the direction of the price change. Whereas, a large percentage change in option price along with below-average volume is less likely to predict a market swing.
Let’s look an example to see how volume gets its value.
In one trading session, one investor buys 15 call options for Stock ABC with a strike price of $20 that expires in a month. Another investor in that same trading session buys 20 contracts of that same call option. The trading volume for this call option in this session is 35 (15 + 20 = 35).
After reading this article, one should know what volume is and how it gets its value. This will be a useful tool to remember when trading options.
Another thing to note, the value for volume can be found on an option chain.
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