RSI values range from , with a value above 70 generally considered to indicate overbought levels, and a value below 30 indicating oversold levels. RSI works best for options on individual stocks, as opposed to indexes, as stocks demonstrate overbought and oversold conditions more frequently than indexes. Options on highly liquid, high-beta stocks make the best candidates for short-term trading based on RSI. All options traders are aware of the importance of volatility, and Bollinger bands are a popular way to measure volatility.
The bands expand as volatility increases and contract as volatility decreases. The closer the price moves to the upper band, the more overbought the security may be, and the closer the price moves to the lower band, the more oversold it may be.
A price move outside of the bands can signal the security is ripe for a reversal, and options traders can position themselves accordingly. For instance, after a breakout above the top band, the trader may initiate a long put or a short call position. Conversely, a breakout below the lower band may represent an opportunity to use a long call or short put strategy. Also, in general, keep in mind that it often makes sense to sell options in periods of high volatility, when option prices are elevated, and buy options in periods of low volatility, when options are cheaper.
The Intraday Momentum Index is a good technical indicator for high-frequency option traders looking to bet on intraday moves. It 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. Using IMI, an options trader may be able to spot potential opportunities to initiate a bullish trade in an up-trending market at an intraday correction or initiate a bearish trade in a down-trending market at an intraday price bump. While the trader can choose the number of days to look at, 14 days is the most common time frame.
The Top Technical Indicators for Options Trading
Like RSI, if the resulting number is greater than 70, the stock is considered overbought. And if the resulting number is less than 30, the stock is considered oversold. The Money Flow Index is a momentum indicator that combines price and volume data. It is also known as volume-weighted RSI. The MFI indicator measures the inflow and outflow of money into an asset over a specific period of time typically 14 days , and is an indicator of "trading pressure. Due to dependency on volume data, MFI is better suited to stock-based options trading as opposed to index-based and longer-duration trades.
When the MFI moves in the opposite direction as the stock price, this can be a leading indicator of a trend change. The put-call ratio measures trading volume using put options versus call options. Instead of the absolute value of the put-call ratio, the changes in its value indicate a change in overall market sentiment.
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When there are more puts than calls, the ratio is above 1, indicating bearishness. When call volume is higher than put volume, the ratio is less than 1, indicating bullishness. However, traders also view the put-call ratio as a contrarian indicator. Open interest indicates the open or unsettled contracts in options. OI does not necessarily indicate a specific uptrend or downtrend, but it does provide indications about the strength of a particular trend. Increasing open interest indicates new capital inflow and, hence, the sustainability of the existing trend, while declining OI indicates a weakening trend.
For options traders looking to benefit from short-term price moves and trends, consider the following:. In addition to the above-mentioned technical indicators, there are hundreds of other indicators that can be used for trading options like stochastic oscillators , average true range, and cumulative tick. On top of those, variations exist with smoothing techniques on resultant values, averaging principals and combinations of various indicators. An options trader should select the indicators best suited to his or her trading style and strategy, after carefully examining the mathematical dependencies and calculations.
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Nikhil Kamath explains. Font Size Abc Small. Abc Medium. Abc Large. So if one were to place an order far away from what the price should be, it would get rejected. What has been the communication with NSE if you have contacted them already? Most of the options seem fine, be it Nifty or stock futures.
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The issue is only with Bank Nifty, wherein the prices are not seeming right. The good thing is the exchange has set execution ranges. So if you were to place an order far away from what the price should be, it will get rejected anyways. We still do not have clarity why this is happening. As I speak, it seems to have gotten resolved and prices are coming back to where they should be. Is this a regular occurrence or does it typically happen during weekly expiry or monthly expiry? Or is this just a one-off?
It is not a regular occurrence.
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It does not happen very often, but we still do not know why this is happening right now. It is for the exchange to come back and clarify. I am sure they will put out a statement in some time. If anybody is trading the Bank Nifty contract, I would advise some caution for a little while. Also, ETMarkets. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds.
Kalpesh Patel days ago. I had filed complain in NSE.