How Important Is Volume When Trading Options?

Options Trading Podcast

Most traders obsess over price charts, but what if one of the most powerful signals is one they often overlook? When it comes to options, volume isn't just a secondary indicator; it's a fundamental safety check.

How important is volume when trading options?

In this deep dive, we reveal why options volume is a "whole different animal" than stock volume. It's not just important; it's vital. This episode explains why ignoring it can be a costly mistake, leading you to get trapped in illiquid positions with massive hidden costs.

You'll learn the crucial difference between Volume (today's action) and Open Interest (the inventory). We break down the four key reasons volume is non-negotiable: liquidity (avoiding getting stuck), pricing (avoiding wide bid-ask spreads), trade confirmation, and spotting unusual "smart money" activity. We also cover the connection between volume surges and implied volatility (IV).

After listening, you'll never look at a "cheap" option the same way again. What's the first volume check you'll add to your trading routine?

Key Takeaways

• Volume vs. Open Interest: These are not the same. Volume is the number of contracts traded today (it resets to zero daily). Open Interest is the total number of existing open contracts (the "inventory" or "parked cars").
• The 4 Critical Roles of Volume:
  1. Liquidity: High volume means you can get in and, more importantly, out of a trade easily. Low volume means you could get stuck.
  2. Pricing: Low-volume options have wide bid-ask spreads, a hidden "tax" that makes you lose money just by entering and exiting a trade.
  3. Confirmation: A surge in call or put volume can confirm the conviction behind a stock's breakout or breakdown.
  4. Spotting Unusual Activity: Massive, sudden volume spikes can be "footprints" of smart money, signaling a potential move.
• Practical Guidelines: As a general rule, look for options with at least a few hundred contracts of daily volume and 1,000+ contracts of open interest to ensure tradability.
• Volume is a "Green Light": Volume doesn't predict direction on its own. Think of it as a traffic light. If the volume is low and spreads are wide (a "red light"), you don't even enter the intersection, no matter how good the setup looks.
• The "Cheap Option" Trap: A "cheap" 10-cent option is a mirage if its volume is zero. You may buy it, but you'll never be able to sell it, leading to a 100% loss.

"Because the first rule in options trading isn't necessarily make money. The first rule is, don't get trapped. Understanding volume is your absolute best defense against that."

Timestamped Summary

• (01:09) The Critical Difference: Options Volume vs. Open Interest
• (02:22) The 4 Key Reasons Volume is Non-Negotiable (Liquidity, Spreads, Confirmation, Unusual Activity)
• (04:33) Cautionary Tale: The $2,000 "Cheap Option" Trap
• (05:13) How Much Volume is "Enough"? (Practical Guidelines)
• (06:03) 5 Tactical Uses for Volume (Confirming Breakouts, Avoiding Spreads, Filtering Trades)
• (10:29) How Pros Use Volume: A Strict Filter for Risk Control

Did this episode save you from a bad trade? Leave us a 5-star review on Apple Podcasts! Know a trader who needs to hear this liquidity lesson? Share this episode with them!

What's your minimum volume requirement for a trade? Join the conversation in our free community and let's discuss.

Support the show