Three of the Top Technical Indicators Used to Trade Options

With hundreds of technical indicators to use, it’s hard to figure out which ones are the best.

The kind of technical indicators that you use can depend on what your trading style is and what type of security is being traded.

Given the fact that options can expire, the holding period is something to really consider for any options trader. While you can hold the position indefinitely with a stock, an option will expire.

Here are several technical indicators that are popular among options traders. These indicators can help you determine what the range of movement is, the direction of the move, and the duration of the move.

The first technical indicator to consider is the Relative Strength Index (RSI). Developed by J. Welles Wilder, this is a momentum oscillator that measures the speed and change of price movements. It oscillates between zero and 100. Traditionally the RSI is considered overbought when above 70 and oversold levels are indicated at under 30.

This kind of technical indicator works best for options on individual stocks instead of indexes. This is because stocks can be overbought and oversold more than indexes.

Bollinger Bands is another technical indicator that is a popular way to measure volatility. They are a type of statistical chart characterizing the prices and volatility over time of a financial instrument or commodity, using a formulaic method propounded by John Bollinger in the 1980s. These bands expand as volatility increases and contract as volatility decreases. The closer price moves to the upper band, the more overbought the security may be, and the closer price moves to the lower band, the more oversold it may be.

The Intraday Momentum Index (IMI) is a technical indicator that combines aspects of candlestick analysis with the relative strength index (RSI). Developed by Tushar Chande to provide investors with a way to find optimal days to buy and sell, it is considered a good technical indicator for high-frequency option traders looking to bet on intraday moves. The IMI combines the concepts of intraday candlesticks and RSI, thereby providing a suitable range (similar to RSI) for intraday trading by indicating overbought and oversold levels.