Utilizing Option Information

Utilizing Option Information

The use of candlestick signals, in their proper positioning for identifying tread reversals and applying a few minutes of option analysis to a trade, can produce high profits that everybody always promises. Utilizing the same principles for evaluating high profit stock trades will make structuring successful option trades relatively easy.

Learning the candlestick signals enhances the ability to identify direction. Being able to identify price movement enhancements signals, such as gaps or bounces close off major technical levels, in conjunction with the candlestick signals, increases the probabilities of establishing a profitable option trade.

Applying that information to various option expirations provide profitable strategies. Able to recognize profitable trading patterns might allow an option investor to sell the near term calls while buying the calls of the next month strike price. Options strategies become measurably more fined tuned when having the ability to evaluate short-term direction based upon candlestick sig­nals during a longer-term price pattern.

The Black-Scholes option pricing model adds an additional element for exploiting specific options that are over or under-priced based upon historic market conditions. As an example, if a bullish candlestick signal indicates a $53 stock as a strong buy, the Black-Scholes model creates an additional profit opportunity. In preparation of executing a call, the $50 strike price and the $55 strike price might be evaluated. If the model indicates the $55 strike price options are priced correctly and the $50 strike price options are undervalued, logic dictates purchasing the undervalued options. Or at least overweighting the $50 options if a combination of both options were being purchased.

The same rationale would be applied to selling calls or puts. When an option strategy was being implemented which involved selling calls are puts, selling the overvalued options becomes a better probability trade.