Finance Wanted.

By Sam Perdue

Traders do not usually learn to combine technical analysis and options trading when they are learning about options. Since options spreads perform best under certain market conditions it can be beneficial to have an understanding of this information. In this essay, I will comment upon the reasons why a trader would need to include this kind of support into their option trading.

More advanced options traders typically focus on elements of risk that can be derived through pricing models. Even though there is risk associated with options trading, this risk can sometimes be mitigated by effectively deriving the markets direction. For example, a rise in the securities price would cause the delta of an option to increase which could affect options spreads that use calls. Therefore, the trader can better position itself to take advantage of market movements if he has a good understanding of technical analysis.

There are some advantages that are usually derived by looking for chart patterns when doing the type of technical analysis that the trader needs to perform when trading options. This can sometimes include topics like wedge patterns, flags, pennants or head and shoulders patterns. This topic can also include other patterns like the Gartley 222 and Elliott Wave. This can in fact yield a benefit to those engaged in option trading. Because these patterns can assist the trader determined the current mode of the market they can be quite helpful.

Once a trader understands the current mode or direction of a market they can choose the strategy that will perform best under those conditions. So, a chart with a bearish bias may be better suited for a bearish put strategy than a bullish call strategy. However, directionally based debit spreads can lose money if the market does not move much due to the time decay of the options used.

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. From among the many option spread candidates that a trader may consider, he can include in his analysis to break even this of the spreads and how they correspond to the areas of support and resistance on the securities price chart.

Traders may want to spend some time learning about technical analysis and how to correlate it to profitable option trading. This type of analysis can help traders understand why some trades are more successful than others while adding a level of complexity that new traders may shy away from. Once the trader has acquired this understanding about his results, he can better position himself to trade with more consistency. In any case, the trader has a supplementary holistic point of view which enables him to blend option stratagies with specialized aids for his option trading.

Sam Perdue has been actively trading the markets for over 13 years. He has written a computer program that helps traders analyze the stock, Forex, commodities and options markets using Fibonacci ratios, Elliott Wave, option pricing and nonlinear programming algorithms. For more information, please see our option trading software.