Options Market Structure

Open interest, implied volatility and gamma exposure — what each one describes

7 min read

Every US options trade is reported, but many of them are hedges, spreads and market making. This guide covers three things the options market does make visible — open interest, implied volatility and gamma exposure — what each one describes, and why none of them reliably reveals direction. It also covers the part TradeAI News measures: Estimated Gamma Exposure, computed from the options chain and OCC open interest.

What Options Activity Can and Cannot Show

An options contract can serve many purposes. A fund may hold puts to protect a stock position. A trader may combine several contracts into a spread whose individual legs mean little on their own. Market makers trade all day to provide quotes and then hedge what they hold. A single trade, seen alone, does not say which of these it is.

That is why options activity, however large, does not reliably reveal where a stock is headed. Analysts try to separate trades that stand out from routine hedging and market making, but whether any of them carries information is not visible from the trade itself. What the options market does show well is structure: how many contracts are open, at which strikes, and how much movement prices imply.

Open Interest

Open interest is the number of contracts that are still outstanding: opened and not yet closed, exercised or expired. Volume counts the contracts traded in a session; open interest is the running total left at the end of the day.

When the day's volume at a strike exceeds the existing open interest, some contracts were newly opened. Open interest alone does not say why they were opened, or which side of each contract is held by whom. In the US, open interest is published by the OCC, the clearing house for listed options, after the day's trades settle, so it always describes the previous session rather than the current one.

Implied Volatility

Implied volatility is the volatility that, put into a pricing model, reproduces an option's market price. Read plainly, it is the size of the move that option prices imply over the life of the contract. It says nothing about the direction of that move.

A rise in implied volatility means the options market is pricing a larger move. It can reflect hedging ahead of a known event or demand for options for other reasons. Ahead of scheduled events such as earnings, implied volatility often rises and then falls once the result is out, a pattern known as IV crush.

The Part We Measure: Estimated Gamma Exposure

Gamma is how fast an option's delta changes as the stock price moves. Gamma exposure adds that up across the chain, weighted by open interest, to show where option gamma is concentrated by strike.

TradeAI News computes it in the open. For each option, implied volatility is solved from the bid-ask midpoint, gamma follows from Black-Scholes, and the exposure per strike is gamma × open interest × the contract multiplier × spot² × 1%, which puts it in dollars per 1% move in the stock, with open interest from the OCC. From that we show net GEX by strike, the call and put walls (the strikes where gamma is most concentrated) and the gamma flip (the price level where estimated net gamma changes sign).

It is an estimate, and the word matters. The sign of each strike follows the usual published convention: call gamma counts as positive and put gamma as negative, which assumes market makers are long calls and short puts — an assumption, not an observed position. Open interest reaches us two trading sessions after the session it describes, and every view labels its as-of date. The result describes the structure around the current price, not where the price goes next. The full method is on the Estimated Gamma Exposure page.

TradeAI News does not ingest trade-level options data. What it shows from the options market is Estimated Gamma Exposure, alongside unusual volume, short interest, insider activity and market events for the same ticker. We measure significance and magnitude, never direction.

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