The total volume of trading in U.S.-listed equity and index options looks set to rise to about 387 million contracts in July, up 16 percent over June, according to a Reuters analysis of data from options clearinghouse OCC.

Average daily trading volume in July surged to 17.3 million contracts, the highest since January.

The last time options trading volumes had jumped higher was in October, when market volatility spiked to close to a three-year high.

The latest surge in the trading volume appears to be linked to hedging demand ahead of the looming rate hike, strategists said.

"Since the financial crisis, options volume on a monthly basis has been a direct function of demand for hedges," said Jared Woodard, equity derivatives strategist at BGC Partners in New York.

In July, traders in the options market were focused on key economic reports that could give clues to the timing of the prospective hike, and appeared to be buying up options that expire over the next several months, he said.

Some increased hedging earlier in July on concerns related to the Greek debt crisis and a stock market rout in China also helped boost options trading volumes for the month, he said.

The strength in trading volume is also tied to relatively low levels of market volatility. While expectations for wild market gyrations were high at the beginning of the year, volatility has remained low for the most part.

The CBOE Volatility Index <.VIX>, the market’s favored barometer of volatility, has had some sharp spikes this year but has had some equally quick retreats. On Friday, the index was up 4 percent at 12.62, just a little higher than its 2015 low of 11.71, touched on July 20.

"The low volatility levels seem like a very good entry point to be long volatility," Michael Purves, head of equity derivatives research at Weeden & Co, said.

Investors expect the run-up to a rate hike and the hike itself to lead to increased volatility in financial markets.

VIX options were particularly busy in July with trading volume surging to nearly 28 million contracts, the highest for any month this year.

The imminent rate hike also bodes well for options trading volume for the rest of the year, strategists said.

(Reporting by Saqib Iqbal Ahmed; Editing by Meredith Mazzilli)

By Saqib Iqbal Ahmed