Option trading technical indicators

Bollinger Bands.
Table of contents

• Using Technical Indicators...
• What are Technical Indicators?
• The Only Indicator an Options Trader Needs

Often I encounter traders that will have as many as 12 indicators on a chart. In my opinion this just confuses people more. This is my belief and it certainly is not the belief of all, but more is NOT better. Clean and simple wins the day for me. The more indicators I place on a chart, the more my eyes start to spin and I get dizzy by all the zig zag lines going all over the place. Besides, it takes your attention away from what really matters…price and volume.

Technical Indicators are like weather forecasting. They don't guarantee what is "going" to happen, but merely guide you in preparing for what is "likely" to happen.

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I don't know what has brought you to my page. Maybe you are interested in options to help you reduce the risk of your other stock market holdings. Maybe you are looking for a way to generate a little additional income for retirement. Or maybe you've just heard about options, you're not sure what they are, and you want a simple step-by-step guide to understanding them and getting started with them.

I have no idea if options are even right for you, but I do promise to show you what has worked for me and the exact steps I've taken to use them to earn additional income, protect my investments, and to experience freedom in my life. Fill in your details below to download your FREE case study. Along with your case study, you'll also get my daily emails where I share my favorite option trading strategies, examples of the trades I'm currently in, and ways to protect your investments in any market.

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Module 5: Technical Indicators. Trader Travis's YouTube Channel. The Options Trading Group, Inc. All rights reserved. While it is believed to be accurate, it should not be considered solely reliable for use in making actual investment decisions.

Futures and options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets. Options on highly liquid, high-beta stocks make the best candidates for short-term trading based on RSI. All options traders are aware of the importance of volatility, and Bollinger bands are a popular way to measure volatility.

The bands expand as volatility increases and contract as volatility decreases. The closer the price moves to the upper band, the more overbought the security may be, and the closer the price moves to the lower band, the more oversold it may be. A price move outside of the bands can signal the security is ripe for a reversal, and options traders can position themselves accordingly. For instance, after a breakout above the top band, the trader may initiate a long put or a short call position.

What are Technical Indicators?

Conversely, a breakout below the lower band may represent an opportunity to use a long call or short put strategy. Also, in general, keep in mind that it often makes sense to sell options in periods of high volatility, when option prices are elevated, and buy options in periods of low volatility, when options are cheaper.

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The Intraday Momentum Index is a good technical indicator for high-frequency option traders looking to bet on intraday moves. It combines the concepts of intraday candlesticks and RSI, thereby providing a suitable range similar to RSI for intraday trading by indicating overbought and oversold levels. Using IMI, an options trader may be able to spot potential opportunities to initiate a bullish trade in an up-trending market at an intraday correction or initiate a bearish trade in a down-trending market at an intraday price bump.

While the trader can choose the number of days to look at, 14 days is the most common time frame. Like RSI, if the resulting number is greater than 70, the stock is considered overbought. And if the resulting number is less than 30, the stock is considered oversold. The Money Flow Index is a momentum indicator that combines price and volume data. It is also known as volume-weighted RSI. The MFI indicator measures the inflow and outflow of money into an asset over a specific period of time typically 14 days , and is an indicator of "trading pressure. Due to dependency on volume data, MFI is better suited to stock-based options trading as opposed to index-based and longer-duration trades.

When the MFI moves in the opposite direction as the stock price, this can be a leading indicator of a trend change. The put-call ratio measures trading volume using put options versus call options. Instead of the absolute value of the put-call ratio, the changes in its value indicate a change in overall market sentiment. When there are more puts than calls, the ratio is above 1, indicating bearishness. When call volume is higher than put volume, the ratio is less than 1, indicating bullishness.

However, traders also view the put-call ratio as a contrarian indicator. Open interest indicates the open or unsettled contracts in options. OI does not necessarily indicate a specific uptrend or downtrend, but it does provide indications about the strength of a particular trend. Increasing open interest indicates new capital inflow and, hence, the sustainability of the existing trend, while declining OI indicates a weakening trend. For options traders looking to benefit from short-term price moves and trends, consider the following:.

In addition to the above-mentioned technical indicators, there are hundreds of other indicators that can be used for trading options like stochastic oscillators , average true range, and cumulative tick. But I know that in most cases, when an index reaches an extreme state a short-term reversal is imminent. Very overbought — an RSI reading of greater than or equal to The time frames are RSI 2 , 3 and 5 days. When it a situation like this arises a high-probability trade should be taken into consideration. Again, the RSI 2 and 5 readings below the chart clearly show that a short-term overbought extreme had been hit.

At that time, I want to make sure my other proprietary indicators line up.

If so, I will fade the move. Remember that fading means placing a trade that opposes the current trend. In this case the move was higher; therefore I bought puts. Remember, you make money buying puts if the underlying asset goes down. Had IWM been at a short-term oversold extreme, I would have bought calls. Enter this trade as a spread to avoid paying double commissions.

Again, I keep it simple, very simple. Why would I want to use an arsenal of gizmos and widgets, when I can use a simple tool like a hammer to get the job done? Simple equals boring, and often that does not entice traders. But I am not here for excitement.