How to Read Options Charts

Option buying charts

If you go to a hospital, option buying charts medical information will be held in a chart-- your temperature, heart rate, pills, even things you mutter in your sleep!

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Similarly, option buying charts charts give traders important information about the history and behavior option buying charts a stock. By revealing price movement, earnings announcements and volume, charts provide useable data. No one can say for sure whether the stock market will be up or down tomorrow, next week or next year. Charts can be configured to show prices by the minute, hour day, week, month etc.

We use minimal technical analysis to read and understand what past price action might mean for future trends. Any price change is recorded first on the charts, and that influences how we trade it. Reading charts is the major part of technical analysis of a stock as opposed to fundamental analysiswhich includes price, volume action and the interpretation of patterns. Type in SPY and select the one-year display. No two stocks are the same. Each has distinct personality traits, just like a option buying charts being.

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Is it popular how many shares trade each day? Does it announce earnings regularly?

Options Charts - How to Use Charts to Trade Options

Does it gap up or down, or move in a continuous flow? How much does it move in response to earnings announcements? Are there clearly defined levels of support or resistance? Are the options for that stock of sufficient volume? One of the key features is the regular behavior of a stock. If the charts reveal a consistent pattern, then it is usually a good candidate for options trading.

How well do you know its personality? Use the questions above to get to know it a little better.

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Comparing it to the SPY will give you some clues. Prices do not appear randomly on charts. If you buy Calls or sell Puts when the stock is near the bottom of the channel, and then buy Puts or sell Calls when it is near the top, you have a successful strategy.

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The best rule is, let the charts suggest the right strategy. Stocks which are in a long-term uptrend attract Bull Put Spreads. Those that trade in a tight range can be candidates for Butterfly Spreads or short Straddles.

Swing traders can use alternating strategies such as Long Puts and Long Calls to trade a "channel". If a stock "fills the gap" then choose the trade which best allows for that, and close the trade once the option buying charts is filled. If options premiums balloon on a stock before earnings, traders can find ways to sell that premium and collect profit from the "volatility crush".

Regular income can be generated by selling far out-of-the money puts and calls once a stock's range is established.

How to Read Options Charts

Charts guide traders toward greater profits. Once strategies are in place, charts can offer points of maximum profitability. Then the stock fell as resistance overtook momentum. The chart gave us our entry and exit numbers. The order in the universe seemed miraculous.

Aren't traders just seeing what they want to see? I have to admit, many of the chart ideas I hear of are gimmicky.

But if the same pattern is confirmed several times, you have to ask if other traders are seeing it as well. If they see, they will trade it. And so should you.

The green and red candles show how the action played out on the charts, and let you know if you should buy or sell. The channel was overall bullish and support and resistance was pretty well established for the session. Knowing how to read an options chart is key if you are going to trade options successfully. Charts are the foundation of trading.

You will be right most of the time, but its not an infallible guide to future price action nothing is! Even if these patterns are only imagined, we must remember that tens of thousands of traders are also looking at these charts, and "seeing" what we see.

Buying the option means you pay this price to the seller. You would only exercise if it is profitable to do so. But the exercise price alone is not doesn't determine probability. So, with a long call we have limited risk the Option Premium while at the same time having uncapped profit potential. Let's look at a graph of this concept; The horizontal line across the graph the x-axis represents the price movement of the underlying instrument - in this example, the share price of Microsoft.

Anyone reading these patterns will trade more successfully. What is the width of the stock movement over time? The first thing to notice about a stock chart is the price range.

Range is defined by the highest and lowest price on the one-year chart. We use yellow dotted lines to show the YTD or one-year ange. Identify the range on each.

The Bottom Line Options have a language all of their own, and when you begin to trade options, the information may seem overwhelming. When looking at an options chart, it first seems like rows of random numbers, but options chain charts provide valuable information about the security today and where it might be going in the future. Not all public stocks have options, but for those that do, the information is presented in real-time and in a consistent order. Option buying charts Takeaways An option chain has two sections: calls and puts.

What percentage is that of the price? Is there anything else you noticed about the range? Is the stock going up, down or sideways over time? Within the option buying charts, you will find major turning points. Each one signals a change in the stock's trend. We find a trend by placing a simple white line along the bottoms or tops of the price action.

The "bullish" or "bearish" trend shows lower lows and lower highs, and the bullish trend shows higher lows and highs.

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Traders will often see the tails of price action conforming nicely to these lines. Is the stock trending up, down or sideways? In ending a trend, does it bottom out like a Hawaiian beach, or like an Arctic precipice?

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Here is MTD showing two trends. The option buying charts trend is starting just as the price moves above the downward line. Try to add lines to the charts, as in the example given.

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How many changes of trend were there over a year on each chart? Is it easy to identify a change of trend? It will be a red line on your price charts. The Moving Average is one of the commonest indicators used option buying charts charts. Not all stock charts are this clear, but this one is easy to trade.

Are there places where there is just a hole in the chart? Take a look at your elected charts option buying charts see if you see any significant gaps. Does the chart have many gaps, and do the gaps subsequently fill?

These are very useful to options traders as they tell us that buyers and sellers have quickly reset their price expectations. Confirming gaps. Gaps are one of the most reliable indications that a stock has changed direction. A new down trend or uptrend will be confirmed by a no-going-back commitment by traders. Look at this chart from PCLN and you will see option buying charts confirming gaps.

This is especially convincing if the gap jumps the Moving Average line. Here are several confirming gaps on a chart for PCLN. Some stocks return to "fill the gap" and others don't.

Reading Charts (Fundamentals of Options Trading) - Honolulu Options Traders

Not all charts have gaps, but some have them consistently. Does it predict the direction of the stock? Interpret them--does the stock "fill the gap"? Is my stock going up and down within a tight range? Look for confirmation signals such as smaller gaps and increase in volume which confirm that option buying charts stock is conforming to the channel pattern.

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Here is SPY, which had been trading in a channel for over 2 years! A sure sign that the American economy is slowly and surely improving. Look for them and identify how they begin or end. How does SPY look now? Is it still in the channel? Support and Resistance At any time, there are prices above which buyers are not willing to buy, and below which sellers are not willing to sell.

How Can I Buy Cheap Options?

Often prices will return to these levels several times before bouncing off them. When the bounce is up, we consider support, when the bounce is down, we term it resistance. Reversals Building on No. This is especially true of momentum stocks such as PCLN.

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Alert traders will be ready and anticipate such movements. Here is a recent example from PCLN. Rather than explain this option buying charts by fundamentals, it is better to say that PCLN's price is a rotating or channelling stock, alternately driven by bulls and bears. Investors simply support the stock, then take profits, then sell it. These reversals are dramatic and fairly easy to trade, even though the stock is expensive, and occur several times a year.

Understanding Option Payoff Charts

Other Chart Patterns Traders also use many common chart patters such as pennants, flags, cup or bowl, V- and U- shaped valleys, bouncing ball and many others. We will leave them for another time!

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  • The next row shows the value of the call option for each scenario.

What about the fundamentals of a stock? A stock may be "overbought" or "oversold" according to market pundits, but again, it is the price that matters. Only the charts tell the truth, as it is price action and nothing else that determines profit and loss for a position.

A positive earnings announcement means nothing unless it produces a change in price--and there is no way to predict what that will be.

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In addition, thousands of traders are looking at the charts and making decisions based on what they see. You should do the same! HOT advice: Learn as much as you can about at least one stock.