If five contracts trade, it is impossible to determine from the volume alone whether it was a buy order or sell order. It is also not possible to tell if a new position was being opened, an old one was being closed, or one participant was simply transferring their position to another trader. Another disadvantage of using volume is that the data is occasionally very sparse or volatile. Smoothing techniques such as moving averages must be applied to mute this variability and make option volume a viable indicator. Open interest for options is similar to shares outstanding for stocks.
Open interest represents the number of open contracts on an option at the end of each day.
Each side of an option order must be to open a new position or to close a preexisting position, regardless of which side is the buyer and the seller. If both parties in a transaction are opening new option positions, then that will cause the open interest on that option series to increase. If one side of the trade is to open and the other side is to close, then that trade will have no net effect on open interest. Open interest is a smoother piece of data than volume. Volume starts anew each day, so it is quite possible for volume to differ dramatically from one day to the next.