tailieunhanh - PROFIT WITH OPTIONS CHAPTER 3

3 OPTIONS AS CONTRARY INDICATORS. LEARNING OBJECTIVES: The material in this chapter helps you to: • Recognize and apply a true contrary indicator. • Interpret OEX and VIX in terms of contrary indicators both for the broad market and for individual stocks and futures. | 3 OPTIONS AS CONTRARY INDICATORS Learning Objectives The material in this chapter helps you to Recognize and apply a true contrary indicator. Interpret OEX and VIX in terms of contrary indicators both for the broad market and for individual stocks and futures. Determine when to engage in straddle buying. Determine when to buy the underlying or when to sell naked puts. Read implied volatility and put-call ratios as signs of market movement. Take a dynamic rather than static approach to interpreting put-call ratios. In the previous chapter we saw how options can be used as a direct indicator that is whatever the option market is saying should be the direction in which the underlying then moves. However that was a fairly narrow application mostly related to 79 80 OPTIONS AS CONTRARY INDICATORS the times when traders with illegal insider information are operating in the marketplace. Most of the time our fellow option traders are unfortunately wrong about their opinions whether those opinions be on the market in general or on a specific stock futures or index. In these other cases then we must treat option statistics as a contrary indicator. In this chapter we ll discuss how to recognize true contrary indicators and use them for successful investing. CONTRARY INDICATORS A contrary indicator is one whose signals must be interpreted in an opposite fashion. That is if the indicator shows that everyone is buying then by contrary interpretation we must sell. Conversely if everyone else is selling according to the contrary indicator then we must buy. There are a number of contrary indicators in technical analysis. Most of them have to do with measuring sentiment among the majority of the trading or investing public. The public tends to be wrong at major turning points in the market. So if we can measure public sentiment and determine when it is extreme then by contrary theory we should be taking positions opposite to those of the majority of the public. Contrary indicators .