Technical indicators

Technical Indicators
By: www.options-trading-education.com

Three technical indicators to watch
in options trading are price,
trading volume, and open interest.
We focus on price because the
price of an option is what we buy
and sell at.
By: www.options-trading-education.com/11068/technical-indicators/

Option price reflects movement of
the underlying equity. Volume and
open interest are used as predictors
of where price will go next.

Whether the trader is engaging in
covered options trading or
uncovered options trading, the
technical indicators of current
price and movement, daily trading
volume, and the day’s end open
interest will help guide trading
decisions.

The price of the underlying equity
and its estimated future price are
the basis of profit in options
trading. However, strike prices and
spot prices in options trading are
only the beginning of what the
trader needs to follow in order to
profit.

Price movement predicts future
price. The pattern of price
movement is a strong technical
indicator. Whether the trader
engages in a long options strategy
or a short options trading strategy
the ability to read market
turnarounds is crucial.

In United States versus other
options trading the trader can
execute options contracts before
their options expiration dates.

If the trader is in the money on an
options contract and sees a market
turnaround coming he or she may
be wise to execute the contract and
profit before the market changes
and the contract becomes out of
the money.

Although the vast majority of
traders watch price activity over
time as a guide to how the market
will price options and their
underlying equities the two other
indicators of volume and open
interest are important.

Of the three technical indicators,
market volume tells you how many
traders are interested in the
underlying. A good rule of thumb
is that equity movement up or
down is only predictive if
accompanied by large increase in
trading volume.

There are times when a handful of
traders and investors will drive the
price of a stock, commodity, or
future up or down. Good risk
management in options trading is
to be skeptical in this situation.

When no one else jumps on board
it is a good time to suspect market
manipulation or just bad trading.

It is not all that uncommon to see
an equity driven up in price in such
a manner only to see it drop
precipitously when the traders
involved cannot get others
interested and run out of money.

No matter what kinds of options
trading you are involved in paying
attention to changes in market
volume is useful.

Open interest is the most
neglected of technical indicators.
The open interest of an option is
the number of contracts, buy or
sell, put or call, on the option that
have not been exercised or off set
by an opposite contract.

Open interest is useful in two
respects. It is an indicator of the
volume of option trading as
opposed to trading of the
underlying which is market
volume.

Open interest helps answer the
question what is an option worth
in that it is also a good predictor of
how large or small the spreads will
be between bid and asking price
when you decide to buy or sell
options.

Open interest and market volume
are good technical indicators of
where an equity price and the
option price are going.

In your options trading for the
New Year consider market volume
and open interest as good
supporting indicators to equity
price when predicting where the
markets will go.

Technical indicators

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Technical indicators