How to Read Options Activity for Clues to a Move

Option activity can help confirm other indicators

Using option activity as an indicator of impending price moves is difficult, subjective, and unreliable. That being said, it can help confirm other indicators and increase the probability of a profitable trade.
Indeed, there have been many situations in which activity in the options pits accurately predicts or presages an impending price move.

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There are 2 basic approaches: as a contrary indicator, or as a predictive.

Contrary readings are predicated on the belief that prevailing investor sentiment is often wrong. Buy and sell signals are usually generated when readings hit extreme levels — such as a spike in the put/call ratio or the  Volatility Index (VIX) —  to flag a market bottom.

The predictive approach toward options activity says this information may actually reveal what the “smart money” is doing. Using options as a predictive indicator is more effective when applied to individual issues, rather than to broad indices or the market as a whole.

Here are some basic criteria for identifying… Continue reading at StockNews.com

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