What is open interest (OI) and volume? How do they help in measuring liquidity?

Open interest (OI) is the total number of contracts held by traders. Open interest excludes exercised and expired contracts. For example, if on a certain day, 3 traders are holding 10 lots of contracts, then the open interest for that day would be 30.

Volume is the total number of options traded between buyers and sellers each day. In the options segment, for every buyer, there is a seller. So, if on a certain day, a buyer buys 10 lots of an option from a seller, then the volume of that option for the day will be 10.

The liquidity of an option is determined using open interest (OI) and volume. These metrics help measure the activity and interest of traders in a given option. Therefore, options with low volume and open interest will have fewer buyers and sellers, and therefore, lesser liquidity.