tailieunhanh - PROFIT WITH OPTIONS CHAPTER 2

2 OPTIONS AS DIRECT INDICATORS. LEARNING OBJECTIVES: The material in this chapter will help you to: • Use options as predictors of market behavior. • Distinguish between direct indicators and contrary indicators. • Use price and volume as technical indicators. • Read the signs of insider trading. | 2 OPTIONS AS DIRECT INDICATORS Learning Objectives The material in this chapter will help you to Use options as predictors of market behavior. Distinguish between direct indicators and contrary indicators. Use price and volume as technical indicators. Read the signs of insider trading. Filter out noise from insider trading activity. Determine whether to buy options or the underlying stock. Understand event-driven straddle buying. Most people associate options with a few basic concepts lever-age some sort of protection or perhaps a way to reduce absolute risk. But the use of options as a technical indicator in their own right is not something that is widespread. Some of the concepts 31 32 OPTIONS AS DIRECT INDICATORS discussed in this chapter have become a little more common in recent years particularly the use of the put-call ratio for making broad market predictions but most investors do not know how to employ these concepts. In addition some of the people attempting to use options as predictors are actually making incorrect use of the material. So in this chapter you learn specifically and correctly how to use options to help you in predicting the movement of the underlying stock futures or index. Just think of this as learning about a new technical indicator. TECHNICAL INDICATORS Any technical indicator is either a direct indicator or a contrary indicator. A direct indicator means that whatever the indicator says about the market is the way that the market is going to move. With options there is really only one direct indicator the one we are going to discuss first and that is the tracking of illegal insider trading. A contrary indicator is one that says the practitioner should take a market position opposite to what the indicator is predicting. Most contrary indicators measure market sentiment and that is true for the options as well. Unfortunately most of our fellow option traders are wrong most of the time especially at major turning points in stocks futures