Previously in this column, we discussed why open interest (OI) is a more meaningful indicator of option liquidity compared to volumes. This week, we discuss whether a one-day lag in OI affects its usefulness as an indicator for liquidity.

Lag indicator

OI captures cumulative open positions in a strike from the time it starts trading. So, the number is meaningful only at the end of trading each day. Suppose the OI in a strike is 25,000 till, say, Tuesday. Furthermore, suppose the total volume on the strike on Wednesday is 10,000 out of which 8,000 contracts were closed by the end of the trading day. So, the new OI as of Wednesday will be 27,000. That is, 25,000 carried forward open interest plus the 2,000 contracts added on Wednesday. 

Now, if you were to use change in OI as an indicator for liquidity, you can only use the metric as of the previous day. So, to trade on Thursday, you will have to use the change in OI data (2,000 contracts per example) as of Wednesday. Is the one-day lag likely to distort the effectiveness of OI as an indicator of liquidity on the strike? The answer depends on when you use the OI measure to initiate a long position. 

Take the weekly Nifty options which close on Tuesday. Typically, the change in OI builds up through the trading week till the penultimate day of expiry. This is despite two important factors. One, weekend events including geo-political tensions across the world can lead to extreme volatility in the Nifty Index when it opens on Monday. And two, time decays on the options during weekends even though the markets are closed. That means change in OI can be effective as a liquidity measure Tuesday through Friday for the coming week expiry.

What about equity options? Equity options are delivery based, unlike index options, which are cash settled. Delivery margins are typically charged starting four days from the expiry of the contract. While that would prompt some traders to close their positions, it should not impact the effectiveness of change in OI as a liquidity measure. This is because delivery margins are charged on in-the-money (ITM) contracts and the strike you will buy will be just out-of-the-money (OTM). That said, you must be mindful of OI as a liquidity measure, as traders tend to close their positions last Thursday through Tuesday of the expiry month. 

Optional reading

If you believe significant number of contracts added to the OI yesterday will not be closed today, then OI should work as a good metric for liquidity. Volumes are good measure of liquidity for intraday trading in options. That said, the simplest way to ensure liquidity is to buy the immediate OTM strike on an underlying. Likewise, the simplest way to ensure that you will have good liquidity when you close your long position is to not let the strike become deep ITM.

(The author offers training programmes for individuals to manage their personal investments)

Published on April 11, 2026