Knowing how to read an options chart is key if you are going to trade them successfully. Understanding components such as expiration date, strike prices, open interest, bid/ask, and the Greeks all 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.
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What Are Options Charts?
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 are using indicators only as a secondary assistant to price action and volume when performing technical analysis on the charts.
Options charts show the buyers and sellers on the chart for that specific strike. Every strike is going to have a different candlestick chart because its in essence it’s own little world. Basically, if you look at a chart of the ETF $SPY, it’s going to look one way. If you look at the put contract for $SPY 314 strike, its going to look very different.
It’s going to have different volume, a different pattern, and overall price action may be different too. That’s because options all have their own individual expiration. 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 set ups. Options trading strategies take practice; especially learning how time decay or implied volatility affect strike prices.
So we all know that patterns play a huge role in trading the stock market whether learning options trading, swing trading or day trading.
When you’re determining whether to do 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.
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 really care about that though. I just want to make money buying and selling the options for a little bit, and capture a little bit of profit in the process. When I day trade options, I have no intention to own the shares. In fact, I hate the idea of being assigned the shares. That is why I trade options while price is moving, and sell them when a stock is stagnant.
Options charts strategies allow you to make money whether the market is up, down or trading sideways. For example, trading credit spreads are a way to minimize risk while protecting your account from huge price movements in the wrong direction. If you’re day trading options, you don’t really care usually about trading spreads. Spread traders tend to swing trade them rather than day trading spreads.
However, you still need to look at options charts for support and resistance as well as direction. That is the very foundation of trading. Never trade an day trade an option without looking at the stock chart and the option chart and getting a plan together. More on that below.
Options Charts Tell a Story
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. In fact, 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 be completely reliant on someone else to tell them what to do. That is why you are here right?
So, with candlesticks, the real bodies and wicks of each candlestick form key support and resistance levels. Check out this option chart below.
Options charts need these candlesticks in order 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 limited risk that an options strategy like the credit spread provides.
Patterns on Options Charts
Now that you know how important candlesticks are to trading options charts, look what else they can do.
When you group candlesticks together, they form patterns. Patterns are what technical traders trade. They let you know if a continuation is going to happen as well as a reversal. If you want to buy a a bear call spread (which is a bearish position because you are selling one call and buying another and keeping the profit) or put options, you wouldn’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? Take our free courses!
However if you saw three outside down patterns on options charts, then a bear call spread or call options would be a good option. Truth be told, 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 do fail and when they do, be prepared to take the trade. It all depends on your risk tolerance, and where you entered your trade.
Technical indicators are also tools of the trade. The moving average lines can be used for support and resistance as well as equilibrium. When a stock’s price moves away from the moving averages, it comes back to it.
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 price action of the chart, and you’ll be more successful.
RSI can be used to let you know when a stock is overbought or oversold and is overdue for a correction. It can also be used to confirm the strength of a trend on options charts.
Options charts are a necessary tool to learn and practice. Open a paper trading account with a company such as ThinkorSwim by TD Ameritrade.
Practicing is going to protect you when begin to use real money. Options are a whole different animal than stocks, and really 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.
Choosing the correct direction is important in most options trading strategies. While there are some strategies that profit off neutral moves, you have to be able to correctly read options charts to place trades.
That’s why 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 option 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?
If you need more help, take our options trading course.
Frequently Asked Questions
- 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 a 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 options expiration date will effect pattern, trend and volume
- 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 expiration's OTM are cheaper
- OTM contracts are also riskier due to time decay
- 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 options 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 do like to trade options on stocks with high ATRs.
- $AAPL - Apple
- $NFLS - 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 on an option:
- Go to Optionistics
- Type in symbol
- Click on option price history
- Click drop down for previous pricing history