Options Trading Tools : Exploring the Market

You have covered the basics and got acquainted with the theoretical notions of options trading. But you don’t know how exactly to correlate them with the real life conditions of the related market. Well, don’t panic, practice and time are necessary to polish your skills as a trader and, moreover, you can use options trading tools to “catch the drift” and get things going.

The present article intends to reveal to what means you can resort in order to better understand the trends and moves that occur on the option market.

Fortunately, tapping into the market’s mood is not an action exclusively based on flair. There are also some instruments that give you an insight on the strength of a market move, the level of fear or complacency driving it. These are called breadth and sentiment tools and allow you to look at statistics such as volume and the number of advancing versus declining stocks. This way, one knows whether gains are generated only by a handful of stocks or they are fueled by a large number of such securities.

Another type of options trading tools can help one gauge the health of a stock market move. A trader gets a sense of the degree of fear or greed associated with and advance or decline if he monitors option activity in a constant manner. It is this kind of information that helps you decide whether the trend can run further or may be stalled in the near future. However, the main function fulfilled by all options trading tools is to provide “feedback” that guides you in making better trading decisions.

Seeing that there are numerous instruments to help you detect the market’s bias, it would be a pity not to use them.The options market has a mind of its own and you never know how it can take by surprise, just when you think that you have the next move figured out. But when monitoring market breadth and sentiment data, you tend to gain a special sense for the market’s mood, picking the subtlest signals.

Now let us briefly analyse the two major options trading tools earlier mentioned:

  • breadth tools

Market breadth has to do with the rises and declines registered on the respective platform. Detecting these oscillating trends, you can gauge the health of a move. The breadth indicators take into considerations the following elements:

- number and volume for advancing and declining issues;
- number of issues reaching new highs and lows;
- up and down volume;
- issues that are trading above or below moving average lines.
  • sentiment tools

Market sentiment generally translates the overriding bias for the market, be it bullish or bearish. There are two distinct trends in terms of sentiment, namely greed and fear. The former is usually responsible for the stimulation of the market, whereas the latter marks a decline in transactions.Sentiment tools are based on stock and options statistics, providing information about crowd activity during advances and declines.

Combining these two types of options trading tools, an investor “intercepts” the signals sent by the market’s trends and can delineate corresponding strategies in advance.

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