Technical Analysis of Options
http://www.options-trading-education.com/14383/technical-analysis-of-options/
Technical analysis of options tells the trader what the options market will do next. Analysis of stock and market sector fundamentals will give the trader and investor an accurate picture of the long term prospects of the underlying equity. Investors and traders will often buy the underlying equity based upon future prospects. However, the expected change predicted by market fundamentals may not take place during the term of an options contract. Thus sufficient market movement to make the options purchase or sale profitable may not happen. To implement a long options strategy or short options trading strategy the trader will typically want to rely upon technical analysis of options and their underlying equities.
Indicators for Technical Analysis of Options Price
Price of the underlying equity and the bid and ask prices of the option are the primary technical indicators a trader will watch. When prices are charted they form patterns. Because trading history repeats itself it is possible to reliably predict the next move of a stock based upon its recent and longer term price patterns. Knowing where the stock price is likely to move next is indispensible information for all kinds of options trading. Tracking the price of the option is not as useful as tracking the price of the stock as the option price typically is a direct result of the stock price. However, there are times when market inefficiency due to heavy trading, confusing information, and the like can lead to an option price that is out of line with the value of the underlying stock. That can be an excellent trading opportunity.
Volume
Volume is an excellent indicator for the technical analysis of options. Both trading volume for the stock and for the option are useful information. In both cases high volume shows trader interest which typically foreshadows price movement. Coupling volume with price movement is a valuable way to confirm a trend. Some traders believe that price trends are only believable if accompanied by high volume. Whether you are engaging in covered options trading or uncovered options trading you will want to keep track of trading volume when you trade.
Open Interest
Open interest is a technical indicator that is often overlooked. Open interest is the number of contracts on the option that have not been exercised or off set by an opposite contract. Open interest indicates options trading volume as opposed to stock trading volume. High open interest will typically serve to reduce the spread between bid and ask price for the option. More open interest means more trading and more trading means more liquidity. Whether you are trading using a strategy such as a long straddle or a short straddle a more liquid market will make your trading software more accurate in the technical analysis of options.
2. Technical analysis of options
tells the trader what the options
market will do next. Analysis of
stock and market sector
fundamentals will give the trader
and investor an accurate picture
of the long term prospects of the
underlying equity.
By: http://www.options-trading-education.com/14383/technical-analysis-of-
3. Investors and traders will often
buy the underlying equity based
upon future prospects. However,
the expected change predicted
by market fundamentals may not
take place during the term of an
options contract.
By: http://www.options-trading-education.com/14383/technical-analysis-of-
4. Thus sufficient market
movement to make the
options purchase or sale
profitable may not happen.
By: http://www.options-trading-education.com/14383/technical-analysis-of-
5. To implement a long options
strategy or short options trading
strategy the trader will typically
want to rely upon technical
analysis of options and their
underlying equities.
By: http://www.options-trading-education.com/14383/technical-analysis-of-
8. Price of the underlying equity
and the bid and ask prices of the
option are the primary technical
indicators a trader will watch.
When prices are charted they
form patterns.
By: http://www.options-trading-education.com/14383/technical-analysis-of-
9. Because trading history
repeats itself it is possible to
reliably predict the next move
of a stock based upon its
recent and longer term price
patterns.
By: http://www.options-trading-education.com/14383/technical-analysis-of-
10. Knowing where the stock price is
likely to move next is
indispensible information for all
kinds of options trading.
Tracking the price of the option
is not as useful as tracking the
price of the stock as the option
price typically is a direct result of
the stock price.
By: http://www.options-trading-education.com/14383/technical-analysis-of-
11. However, there are times when
market inefficiency due to heavy
trading, confusing
information, and the like can
lead to an option price that is out
of line with the value of the
underlying stock. That can be an
excellent trading opportunity.
By: http://www.options-trading-education.com/14383/technical-analysis-of-
13. Volume is an excellent indicator
for the technical analysis of
options. Both trading volume for
the stock and for the option are
useful information. In both cases
high volume shows trader
interest which typically
foreshadows price movement.
By: http://www.options-trading-education.com/14383/technical-analysis-of-
14. Coupling volume with price
movement is a valuable way to
confirm a trend. Some traders
believe that price trends are only
believable if accompanied by
high volume.
By: http://www.options-trading-education.com/14383/technical-analysis-of-
15. Whether you are engaging in
covered options trading or
uncovered options trading
you will want to keep track of
trading volume when you
trade.
By: http://www.options-trading-education.com/14383/technical-analysis-of-
17. Open interest is a technical
indicator that is often
overlooked. Open interest is the
number of contracts on the
option that have not been
exercised or off set by an
opposite contract.
By: http://www.options-trading-education.com/14383/technical-analysis-of-
18. Open interest indicates options
trading volume as opposed to
stock trading volume. High open
interest will typically serve to
reduce the spread between bid
and ask price for the option.
By: http://www.options-trading-education.com/14383/technical-analysis-of-
19. More open interest means more
trading and more trading means
more liquidity. Whether you are
trading using a strategy such as
a long straddle or a short
straddle a more liquid market will
make your trading software
more accurate in the technical
analysis of options.
By: http://www.options-trading-education.com/14383/technical-analysis-of-
21. For making a living trading
options or for occasional options
trading the trader will rely on
price patterns in the technical
analysis of options. A common
way to trade options is to find a
stock that trades in a channel.
By: http://www.options-trading-education.com/14383/technical-analysis-of-
22. The trader will buy or sell puts or
calls depending upon whether
the stock is at the top of its
trading range or at the bottom.
Price patterns also predict
market reversals which can also
be useful for options trading.
By: http://www.options-trading-education.com/14383/technical-analysis-of-
