Popular Indicators Used For Options Trading


Traders can use a variety of technical indicators depending on their trading style and the type of securities they are trading. This article focuses on a few key technical indicators that are often used by options traders. Options Trading can help you grow a small account into a much larger one. However, you can enjoy all of that with the lowest brokerage you can find for options trading. Zebu gives you this and more. As one of the best in the country, you also get the best trading accounts from us. Please get in touch with us to know more. What Makes Options Trading Unique In short-term trading, technical indicators are often used to help the trader in determining: Range of a move The movement's direction (which way?) How long will the price move? How long will the price move? The holding period is important since options are subject to time decay. A stock trader can keep a position indefinitely, whereas an options trader is limited by the option's expiration date and its term. Momentum indicators, which tend to detect overbought and oversold levels, are popular among options traders due to the time restrictions. Let's take a look at some of the most common indicators utilised by options traders, such as momentum and others. The Relative Strength Index (RSI) The relative strength index is a momentum indicator that compares the amount of recent gains to recent losses over a given period of time to determine overbought and oversold conditions in a security. RSI readings vary from 0 to 100, with a value more than 70 indicating overbought levels and less than 30 suggesting oversold levels. Individual stocks, rather than indexes, benefit from RSI because stocks exhibit overbought and oversold positions more frequently than indexes. The ideal choices for short-term trading based on RSI are options on highly liquid, high-beta stocks. Money Flow Index The Money Flow Index is a momentum indicator that takes into account both price and volume. Volume-weighted RSI is another name for it. The MFI indicator is a "trading pressure" indicator that gauges the entry and outflow of money into an asset over a given period of time (usually 14 days). A value of more than 80 suggests an overbought stock, while a reading of less than 20 indicates an oversold stock. MFI is more suited to stock-based options trading (rather than index-based) and longer-duration contracts due to its reliance on volume data. The MFI can be a leading signal of a trend change when it goes in the opposite direction as the stock price. Put-Call Ratio (PCR) The put-call ratio compares the amount of trade in put and call options. Changes in the put-call ratio's value, rather than its absolute value, indicate a shift in general market opinion. When the ratio of puts to calls is greater than one, it indicates bearishness. When call volume exceeds put volume by more than one, the ratio is less than one, suggesting bullishness. Traders, on the other hand, regard the put-call ratio as a contrarian indication. Open Interest The open or unsettled contracts in options are referred to as open interest. The OI may not always suggest a specific uptrend or downtrend, but it does give insight into the strength of a trend. Increased open interest signals new capital influx and, as a result, the continuation of the current trend, whereas dropping OI signals a weakening trend. While you take care of your options trading strategy, we take care of the rest. As one of the fastest-growing best trading accounts as well as the lowest brokerages for options trading To know more about our services and products, please get in touch with us now.