Best Technical Indicators for Option Trading in TradingView

Trading in the option market is more volatile and riskier than the cash market, as there are multiple factors behind the movement of the underlying security trading in the option segment. But if you trade with the right strategy and technique, you can make more money than the cash segment.

In future options, only a few indexes and stocks are included, so you have a limited number of underlying securities to trade in the option market. To analyse the main index or stock in the option market you can use various technical indicators that will give you more insight to make the right decision before entering into any trade position.

Also Read: What are the Top Best & Most Used Indicators in TradingView

In TradingView you can use various technical indicators but all of them are not suitable for every type of underlying security. Similarly, for the option market, you need to use different indicators that can give a true picture of the underlying security movement. Hence, we brought here the list of top indicators for option trading.

Top 10 Best Indicators for Option Trading:

1. Change in Open Interest Data

In the option market, open interest or OI is one of the best technical indicators that you can use to analyse the trend of change in the price of the underlying security. Though, it does not give an indication of an uptrend or downtrend it shows the strength of the trend. And to analyse the OI, as an indicator you have to correlate price change with change in OI.

Also Read: How to Use Open Interest for Intraday Trading or Trading

An increase in the open interest with an increase in the option price of an underlying security means there is a positive sentiment in the market indicating a bullish trend in the coming days. On the other hand, when open interest increases but the price of the underlying security decreases, it shows there is bearish sentiment among the traders that will bring down its price.

However, when the open interest decreases and the price of the underlying security is increasing it also shows there is a weak trend and bearish sentiment among the traders. And when OI decreases and the price of the underlying security also decreases, it means the security is weakening giving the bearish signal or low volume of trading in the coming days.

2. Volume Indicator for Option Trading

Volume plays an important role in analysing a security from the technical analysis perspective. An increase in volume can lead to a significant change in the price of the underlying security. In the options market, volume refers to the number of contracts traded in a particular time period. The volume indicates the level of trading activity in the underlying security.

Also Read: Best Volume Indicators for Day Trading & How to Use for Intraday

When there is a huge volume in the options contracts, it means there is a lot of interest in the options market, while a low level of volume means there is a lack of interest in the particular underlying security giving less trading opportunity for the traders. In TradingView you can use various types of volume indicators that can give you useful insight about the movement of the underlying security with its trend and possibility of further movement in any direction.

Also Read: How to Add, Read & Use Best Volume Indicator in TradingView

3. Implied Volatility

As we have already told you, the option market is more volatile than the cash market. Hence, you can use the volatility index in the option market to gauge the trading activities in the options market. The level of volatility in the underlying security shows the scope and range of movement of the same within that it can move giving the wider trading opportunity.

Also Read: How to Trade in High Volatile Market: Best Trading Strategies

On the other hand, implied volatility is a kind of expected volatility of an underlying security for a specific time period. The implied volatility is mainly influenced by the demand and supply of the underlying security along with the expectations of change in the price of the underlying price. Hence, you can use the implied volatilityas an analysis tool while trading in the option market.

4.Put-Call Ratio (PCR) Indicator

Put-Call Ratio is another one of the best indicators for option trading that will tell you the trading volume between the put options and call options. The put-call ratio helps to measure the trading volume using the put option contracts versus call options contracts. The change in the value of the put-call ratio indicates the change in overall market sentiment.

To analyse the put-call ratio, when more call contracts are being bought than puts, the ratio will be more than 1, which indicates the bullish signal in the underlying security. On the other hand, when the put volume is more than the call volume, the ratio is less than 1, indicating the bearish signal in the underlying security. You can use this Put-Call Ratio to identify the sentiment of the traders towards that particular underlying security.

5. Money Flow Index (MFI)

Money Flow Index is another useful indicator that you can use for analysing the underlying securities in the option market. The money Flow Index also known as the volume-weighted RSI is a kind of momentum indicator that measures the outflow and inflow of money into the underlying security for a specific time period.

When the Money Flow Index is trading over 80, it indicates the security is trading in the overbought zone, while when this index is trading below 20, it means the underlying security is trading in the oversold zone creating the buying opportunity for the trader. As this indicator is highly dependent on the volume data, hence you can use this for stock-based option trading and works better for long-duration trading.

6. Intraday Momentum Index

The Intraday Momentum Index is one of the best technical indicators for the option traders use to trade in intraday. It is the combination of the concept of intraday RSI and candlesticks that gives a range for the intraday trading giving the indication of overbought and oversold zones.

Also Read: Best Candlestick Patterns for Day Trading and Option Trading

You can use the IMI indicator as an option trader to identify an opportunity to go for long positions in the up-trending market at an intraday correction. And you can go for the short position in the down-trending market when the price in intraday falls. And when MFI moves in the opposite direction, there would be a trend change in the price.

Also Read: How to Select Stocks for Intraday: 10 Tips to Pick Best Stocks

7. ADX Indicator for Option Trading

Average Directional Index or ADX is also one of the best trading indicators that shows the strength of the trend. You can use this indicator to determine whether the market is trending in any particular direction or running sideways with the indication of upcoming trend reversal in the market.

The ADX index oscillates between 0 to 100 with the different values giving different strengths. When ADX trades below 25 it means the trend is weak, while when ADX trades between 25-40 range it gives the indication of moderate strength. And when ADX is above 40, the trend is strong and gives a strong signal of buying in option contracts.

8. Supertrend for Option Trading

Supertrend is another useful indicator for options trading showing the trend with a strong signal of buying and selling in option contracts. One of the best advantages of supertrend is you can use it for 15 minutes, hourly weekly, or daily basis as per your trading strategy. It is a trend following indicator work in the cash as well as option market of equity, commodity and forex trading.

Also Read: How to Use Supertrend Indicator in TradingView: Settings & Strategy

The super trend indicator is plotted on the candlestick chart patterns with the clear visibility of the trend with coloured lines. A trend line in green is plotted when prices have risen, and a red trend line is drawn when the price has dipped showing the downtrend in the underlying security.

As the Supertrend indicator combines many periods into one. Hencefor option trading, you can use the supertrend that will help you to know whether the trend likely to continue further or not.

9. Relative Strength Index (RSI)

RSI is one of the most useful momentum oscillators that help to measure the speed and change of price movement with the strength of the price movement. The values of RSI oscillate between 0 to 10 but are considered between 30 to 70.

When the RSI is below 30 levels it shows the stock price is trading in the oversold zone. When the RSI is above 70, it indicates the price of the underlying security is trading in the overbought zone. In option trading, RSI works best for individual stocks compared to the index. In TradingView you can use the RSI for option contracts and other highly liquid stocks.

Also Read: How to Add & Use RSI Indicator in TradingView: RSI Settings & Strategy

10. Bollinger Bands for Option Trading

Bollinger Bands are one of the most suitable indicators for the underlying securities that are highly volatile. There are three bands and when volatility increases, the bands expand, and when volatility decreases the bands contract. When the price is near to upper band it means underlying security is overbought and when the price is closer to the lower band, it shows the overselling.

Option traders can utilize the expansion and contraction of the band as a trading opportunity. If the price of the security moves outside the band, it means there is likely a trend reversal. When there is a breakout above the top band, you can buy put or short the call. While a breakdown below the lower band gives an opportunity to go for a bullish option strategy like a long call or short put.

Also Read: What is Breakout & Breakdown How to Identify Breakout in Stocks

Some Other Useful Indicators for Option Trading

Delta and Gamma

Delta is the measurement to know how much an option price will change for a one-point move in the underlying security. This indicator helps to determine how much a trader can take risk while entering into a particular option contract.

On the other hand,Gamma helps to measure how much an option’s delta will change for every one-point move in the underlying security. This is another very useful indicator that helps to know how much risk there is if the price of underlying security moves in a particular direction.

Theta or Time Decay

In option trading there is the expiry date of every contract, your trade position will be square off on the date of expiry. Meanwhile, the price movement of the underlying security keeps changing due to multiple factors, and time decay is one of the important factors that gradually erodes the value of the option contract as soon as it is reaching to the expiration date.

Theta is that indicator or you can say the meter that can tell you the time value of money. Based on this you can buy or sell the option contract and close your position timely. When you enter into an option contract, and the index or underlying security not moved from its position, the value of options contract will be changed due to time decay.

Summing-up

The option market is more volatile than the cash market, hence trading in this segment is riskier too. And based on these risks and volatility, the technical indicators for option trading are different. You can use the open interest, implied volatility and put-call ratio-like indicators to analyse the trend and other factors while entering into any option contract.

Also Read: Top 5 Best Technical Indicators for Intraday or Day Trading

Apart from that RSI, Bollinger Bands are also useful in analyzing the price movement and trend of the underlying security. In TradingView you can apply multiple types of technical indicators at the same time or individually as per your understanding. You need to trade with the help of an expert to trade with the right strategy that can work in the option market.

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Also Read: Choosing the right broker: Decoding the mystery of lowest brokerage charges