Knowing how to read an options chart is key if you trade them successfully. Understanding components such as expiration date, strike prices, open interest, bid/ask, and the Greeks play a fundamental role in how options contracts come together. Charts are the foundation of options trading. Reading charts makes or breaks traders, no matter how seasoned you are. Don’t get caught in a bad situation trading options and not knowing how to read a call or put chart.
Options charts show you the buying and selling of options contracts on the chart. Day traders of options tend to be the most concerned with these types of charts. Swing traders tend to focus more on the stock chart vs the options chart. Most seasoned traders use indicators only as a secondary assistant to price action and volume when performing technical analysis on the charts.
What Are Options Charts?
Options charts show the buyers and sellers for that specific strike. Every strike will have a different candlestick chart because it’s essentially its little world. If you look at a chart of the ETF $SPY, it will look one way. If you look at the contract for the $SPY 314 strike, it will look very different.
It will have a different volume and pattern, and overall price action may be different, too. That’s because options all have their expiration dates. Unlike a stock chart, their contract expires at a specific date.
It’s important to remember that trades will go against you even with the best setups. Options trading strategies take practice, especially learning how time decay or implied volatility affects strike prices.
So, we all know patterns play a huge role in trading the stock market, whether learning options trading, swing trading, or day trading.
When determining whether to make a bullish or bearish trade with a trading strategy, you need to be able to look at options charts and read the patterns, examine the technicals, and then decide to take the trade.
Options Charts Example
Breakdown
Trading options is a great way to grow your brokerage account. Options give you the right but not the obligation to buy (call) or sell (put) at a specified price. One contract controls 100 shares. Most options traders don’t care about that, though. I want to make money buying and selling options and capture a little bit of profit in the process. When I day trade options, I have no intention of owning the shares. I don’t like the idea of being assigned the shares. That is why I trade options while the price moves and sell them when a stock is stagnant.
Options chart strategies allow you to make money whether the market is up, down, or trading sideways. For example, trading credit spreads is a way to minimize risk while protecting your account from huge price movements in the wrong direction. If you’re day trading options, you usually don’t care about trading spreads. Spread traders tend to swing trade options rather than day trade spreads.
However, looking at options charts for support, resistance, and direction would be best. That is the very foundation of trading. Never trade a day trade an option without looking at the stock chart and the options chart, and getting a plan together. I’m sharing more on that below.
Here, we are looking at an hourly candlestick chart at the monthly expiration of $SPY 314 Puts. As you can see, the options bounced over the previous day’s high.
How Do You Read Options Charts?
- Make sure you have a broker that lets you read the options chart.
- Open a Call or Put Option Chart by selecting the options contract from the ledger.
- The screen now shows the candlestick chart of the call or put option.
- Use an options chart in conjunction with a regular stock chart when trading.
- Determine the pattern of the stock chart and options chart trend.
- Decide your entry and exit based on the stock chart AND the Option Chart.
- Monthly & weekly expiration dates will have different patterns and volume.
- How many days until the option’s expiration date will affect pattern, trend, and volume?
An option chart of $BYND calls.
Candlesticks
How many times, as new traders, have we traded without knowing candlesticks? Sure, we know the basics, such as bullish and bearish candlesticks, maybe even doji candlesticks.
However, do we know the different types of doji candles and what they mean? Each candlestick tells a story. Candlesticks are the very foundation of stock trading. Without them, moving averages mean nothing. We wouldn’t know how other traders view a stock, and there would be no patterns to trade. We’d have to rely on a trading guru to tell us what to do. Boo!
No one wants to completely rely on someone else to tell them what to do. That is why you are here, right? So, with candlesticks, each candlestick’s real body and wicks form key support and resistance levels. Check out this option chart below. Options charts need these candlesticks to know which direction to go. You wouldn’t want to go bearish on a trade that is moving in a bullish direction. Right?
There are lots of things that affect the price of an option contract. That’s why picking the right strike and expiration date is so key. Not paying attention to the charts and buying the wrong thing is the perfect way to blow up your account. Even with the limited risk that an options strategy like the credit spread provides.
Patterns
Now that you know how important candlesticks are to trading options charts, look at what else they can do.
When you group candlesticks, they form patterns. Patterns are what technical traders trade. They let you know if a continuation or a reversal will happen. If you want to buy a bear call spread (a bearish position because you are selling one call and buying another and keeping the profit) or put options, you won’t do that on an inverse head and shoulders breakout. Why? Because inverse head and shoulders are bullish patterns.
Yes, Inverse head and shoulders patterns are bullish breakout patterns. How could you know that?
However, a bear call spread or call options would be good if you see three outside-down patterns on options charts. These patterns can be applied to forex, crypto, futures, or stock trading.
Consequently, it’s important to remember that patterns do break down. You may want to wait for a pattern breakout to retest support or resistance and hold before placing a trade. Bullish and bearish patterns fail; when they do, be prepared to take the trade. It all depends on your risk tolerance and where you entered your trade.
The Technicals
Technical indicators are also tools of the trade. The moving average lines can be used for support, resistance, and equilibrium. When a stock’s price moves away from the moving averages, it returns to them.
Moving average crossovers are also great buy and sell signals. You don’t need a lot of indicators to be a successful trader. However, they are helpful. Again, focus on the chart’s price action, and you’ll be more successful.
RSI can let you know when a stock is overbought, oversold, or overdue for correction. It can also be used to confirm the strength of a trend on options charts.
Final Thoughts: Options Charts
Options charts are necessary tools for learning and practicing. Open a paper trading account with a company such as ThinkorSwim by TD Ameritrade.
Practicing is going to protect you when you begin to use real money. Options are different from stocks and shouldn’t be traded the same way. They are more challenging but also more rewarding (and risky). Let’s not forget that options were originally designed to be insurance! Not a trading vessel.
We recommend placing hundreds of practice trades before using real money. As a result, you learn to protect yourself as you’ve worked out the kinks. You really should study the options Greeks to become an options trading master. Can you trade them without knowing these two areas? Sure. But in time, you can learn EVERYTHING, so why wouldn’t you want to study more?
Choosing the correct direction is important in most options trading strategies. While some strategies profit from neutral moves, you must be able to read options charts to place trades correctly.
Frequently Asked Questions
- The cheapest options contracts that you can buy are OTM (out of the money)
- Pricing gets cheaper the more that you go out of the money
- Also, closer expiries' OTM are cheaper
- OTM contracts are also riskier due to time decay
- The likelihood of them being ITM at expiration is slim - look for high-probability trades
- Choosing cheaper stocks also cuts the cost of contracts
- Finding options with low IV
- Credit spreads are one of the cheapest and safest option strategies
- Debit spreads cut down the cost of naked spreads
- Naked options are the most expensive
The stocks below are selected because they have a high ATR. These are not recommendations to buy, but we like to trade options on stocks with high ATRs.
- $AAPL - Apple
- $NFLX - Netflix
- $GOOG - Google
- $AMZN - Amazon
- $TSLA - Tesla
- $NVDA - NVIDIA
- $AMD - Advanced Micro Devices
- $BYND - Beyond Meat Inc
- Here's a simple way to find the price history of an option:
- Go to Optionistics
- Type in symbol
- Click on the option price history
- Click the drop-down for previous pricing history
