How to Use Option Charts to Boost Trading Profits
Consider multiple factors when trading options. As derivative instruments, options have more features to consider than the underlying markets they track. When you feel a certain stock will rally or fall, either buy or short that stock. In contrast, if you want to trade an options market, you can choose between call options and put options and buy or sell either variety. Additionally, options have other unique characteristics such as strike prices and expiration dates. Because of all these factors, an option chart is a very helpful aid for traders. Knowing how to read and apply an option chart will help you profit.
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Instructions
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Compare the option's strike price to its bid and ask prices. Options can be divided into three categories based on their strike prices: in-the-money, at-the-money and out-of-the-money. The deeper into the money a strike price, the more expensive the option. Use this information to your advantage by selling out-of-the-money options that appear to be overpriced and buying in-the-money options that appear to be underpriced.
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Consider bid and ask prices in relation to the expiration dates. Options that have expiration dates further in the future are more expensive than options with nearer expirations. This price difference occurs because the options with more time until expiration have more of a chance to be in the money at expiration. Knowing this, look for underpriced far-term options to buy and overpriced near-term options to sell.
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Look for sufficient volume. The more trading volume a market has, the higher the liquidity. High liquidity ensures that you can enter and exit the market easily and get trades filled at the price you want.
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