There have been thousands of technical indicators that can utilize with the trader’s convenience on the trading style and type of security. There are many technical indicators on the net to get help in the short term trading to trade on the basis of a range of movement, duration of the move, direction of the move, etc. As the options are subjected to decay with time, holding periods takes in much significantly. A stock trader can hold his position, while an options trader is limited by the duration of the expiration date. Here, constraints and momentum indicators tend to identify the oversold and overbought levels. The other common indicators used by options traders are:
- Relative Strength Index
Being a momentum indicator, it compares the magnitude of the recent gains or the losses over a specific period of time to measure in the security’s speed and change in price movements in an attempt to make sure of the overbought and oversold conditions.RSI value ranges from 0 to 100 with a value more than 70 indicate the overbought levels and a value below 30 shows the oversold levels. The RSI works best for the individual stocks as they demonstrate the oversold and overbought conditions more frequently than the other indexes.
- Bollinger Bands
Bollinger bands are famous in the market to measure volatility. The band expands with the volatility but the contract as volatility tends to decrease. The more close the price moves to the upper hand, the more overbought the security gets and closer the price moves towards the lower band and it might get oversold.
A price that is moving outside the band can signal the security for a reversal and options traders to position themselves. Also, a breakout below the lower band is represented as an opportunity to use a long call or put the short strategy. Most importantly keep in mind to sell options in periods of high volatility when prices get elevated and buy options in a period of low volatility and cheaper options.
- Intraday Momentum Index
It can be used for option by traders to look forward in betting on the intraday moves. It is a combination of concepts of intraday candlesticks and RSI, which provides a suitable range for trading to indicate the oversold and overbought levels.
An options trader must be able to spot the potential chances to initiate a trade in the trending market at an intraday correction or should start a bearish trade at an intraday price bump.
- Money Flow Index
It is the momentum that can combine the price and volume data. It measures the outflow and inflow of money into the security under a specific period of time to indicate the trading pressure. For example, reading over eighty indicates that it’s overbought security and below twenty show that it is oversold security. Due to its dependency on volume data, it is better suited to stock-based options trading and longer duration trades.
Read More: 6 MOST POPULAR CURRENCIES FOR TRADING AND WHY?
- Put Call Ratio Indicator
It measures up the trading volume input option versus that of the call options. When there are fewer calls than the puts, the ratio is above 1 which indicates bearishness and vice versa indicates bullishness. However, many of the traders view this ratio as a contrarian indicator.
- Open Interest
This indicates the unsettled contracts in options. It doesn’t indicate specific uptrends or downtrends but it provides in to give indications on the strength of a particular one. With the increasing open interest, it indicates new capital inflow, therefore the sustainability of existing trends while the open interest can indicate the weakening trend.
In the talk about the technical indicators, there are hundreds of other indicators that can be used for trading options. On top of this, many variations exist with the techniques on resultant values, averaging the principles, etc. An options trader must select the indicators that best suit his trading strategy and style.
Read More: GET TO KNOW EVERYTHING ABOUT PIP