How can I analyze a stock option using technical analysis?

General
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If some X share (EQ segment) looks strong technically , then can we think that the X Option (derivative) is looking strong technically?  

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Usually it is best avoided to look at option charts technically as there are too many variables that determine the price of option. There might be times when stock prices is going up, but call option values could drop because of volatility reducing.

So if you are trading options based on the underlying stock price, I’d say technical analysis is not the best way to determine which options to trade.

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3

to be able to successfully trade options, knowledge of its movement and factors that affect it is very important.

Trading futures is fairly simple as compared to trading options.

To trade options, we need to know/realize that:

  • options consist of time value that diminishes daily, (rapidly during last 30 days).
  • options have delta, i.e the relative move to underlying. Underlying moves 1 point, the option may move just .50 or .20 depending on strike.
  • volatility (aka fear index) is a important factor in determining option strike/strategy.

While many enter options trading purely to win lottery (yes, trading options w/o knowledge of greeks is lottery), only the ones who understand the dynamics stay successful.

by writing these, i do not wish to discourage you from options trading.  In fact, it is one of the best way to enter market and make money.  You know in advance, what you stand to lose and what you stand to gain.  To me, options is one of the best financial instrument to make consistent money.

If you are good at Technical analysis and have identified a potential trade on a stock/index, here's what you can do:

  • trade the underlying stock/index
  • trade futures
  • trade options - lots of strategies available here.  

apart from projected move of the underlying, you need to determine, velocity of move, time.  The possibilities are many.

One of the great options trader - Dan (from traderji forum) put across beautiful article on options trading.  Do take a look.

all the best.

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4

After the technical study of the underlying Ghoda, following steps can be followed:

1)Come up with targets and stop losses for the Ghoda in equity market along with the expected timing.

2)Look into the respective Option chain at www.nseindia.com.( http://www.nseindia.com/live_market/dynaContent/live_watch/option_chain/optionKeys.jsp?symbolCode=-10007&symbol=NIFTY&symbol=NIFTY&instrument=-&date=-&segmentLink=17&symbolCount=2&segmentLink=17 ) Observe for the activity of various strike prices. Considerable number of strike prices should be active with good volume traded. If not, forget about this particular Ghoda and search for the active ones at http://www.nseindia.com/live_market/dynaContent/live_analysis/most_active_underlyings.htm

3)After Step 2 is Yes, map the Ghoda into one of the categories. ( http://www.moneycontrol.com/stocks/fno/marketstats/futures/oi_inc_p_inc/index.php) Reconfirm for the technical study matching with the current condition in Options.

4)Calculate the option premium values for various strike prices using the Option Calculator(Shift+O), inputting targets and stop losses from Step 1.

5)Decide yourself with the data from Step 4 on which kind of Risk can be taken. Ride the Ghoda with a suitable Option strategy. Initially ride the Ghoda for small good profits/loss. On getting used to it, ride for longer gr8 profits/loss.

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5

thanks nithin… what are the best ways to determine which options to trade ? please explain

6

Plz provide the link of an artical about options by Dan

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wow… very nice post… thanks a lot… :slight_smile:

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Thanks for the link, loke!

10

please anybody provide me how can i go for stock option trading.

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How about you get understanding about Options and get to know how they work.