By: Steve Smith
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.
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 —Â such as aÂ spike in the put/call ratio or theÂ Volatility Index (VIX) —Â 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
Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.