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 — 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