Options Trading, Technical Analysis Equals Higher Profits

By: Sam Perdue

Combining technical analysis with options trading is not a typical course of study when learning how to trade options. Option traders who want to maximize the return need to understand how to combine their options analysis with certain market conditions. In this article, I will wade through the reasons why a trader would prefer to incorporate this genre of analysis into their option trading.

Certain elements of risk can be derived through an options pricing model which helps the advanced trader. But, the risks associated with options trading are sometimes mitigated by correctly determining the market?s direction. If the trader decides to use calls and his spread, the delta of the call could increase if the security makes a bullish move. So, a good understanding of technical analysis can help the trader better position himself for the current market conditions.

The type of technical analysis that a trader needs to perform when trading options usually falls under the category of chart patterns. This can sometimes include topics like wedge patterns, flags, pennants or head and shoulders patterns. Patterns like the Gartley 222 and Elliott Wave can also fall under this heading. This can genuinely grant a benefit to those involved in option trading. Because these patterns can assist the trader determined the current mode of the market they can be quite helpful.

Understanding the direction that a market may take can help the options trader in determining which strategy will be most profitable. Therefore, a bearish option strategy can be more profitable if the trader is observing a chart that has a bearish bias. But, time decay could cause the options trader to experience losses if the spread is placed for a net debit and the market does not move in his anticipated direction.

The usefulness of this type of chart formation can be derived by the fact that it helps a trader visually identify areas of support and resistance. If the trader has a spread with a break even that corresponds to an area of support or resistance, it can help the trader as he compares this spread against other candidates that might have lower or higher break even values.

When learning how to trade options effectively, traders may wish to also understand how they can effectively combine their new knowledge with technical analysis. While new traders may find this type of technical analysis to be very complex while learning to trade options, the long-term benefits of going to this exercise could help them understand why some trades are more successful than others. Trading in this way the trader may find that he is able to trade with more consistency was he is derived this level understanding about his results. In the end, the trader has a more holistic landscape which permits him to associate option stratagies with intricate aid for his option trading.

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