Technical Analysis and Options
Many investors use fundamental analysis to determine whether shares in a particular company are worth buying or selling. Fundamental analysis is simply the study of financial statements, management, competitive advantages, competitors and industry potential. While this information can be powerful in determining the potential (or lack there of) future growth of a company, it does not account for the nature of a free trading market.
Technical analysis reflects supply and demand in its purest form, which has little to do with the fundamentals of a company over any short-term period. Since share prices adjust to new publicly available information, one can assume that all known information is priced into the markets as share values adjust to reflect the new valuations. This supply and demand sequence is best mapped out using price charts. Changes in the “ebb and flow” of supply and demand can be identified much more effectively.
There are two very powerful arguments for incorporating technical analysis into a sound trading and investment approach when considering options. The first is that one of the most significant pricing variables in an option contract is the underlying security. When selecting a call or put, specific strike price and expiration date a price chart can help the investor establish a “road map” for proper strategy selection and position management. Secondly, since time is a major factor in the options price… timing is everything. By understanding how to read potential changes in trend on a price chart, the investor can better time their option purchase and sale.
Incorporating technical analysis as part of a sound trading and investment plan has many bennifits for option buyer and writer. To find out more about technical analysis and how it relates to options, join me at the upcoming Options Education Day on February 26, 2011. For more information and to register, click on the link below.
Options Education Day Registration
I hope to see you there!
Jason
CEO and Director of Business Development
R.N. Croft Financial Group
Jason is CEO and Director of Business Development at R N Croft Financial Group, a member of the Croft Investment Review Committee and a Derivative Market Specialist by designation. In addition, he is an educational consultant for Learn-To-Trade.com and an instructor for the TMX Montreal Exchange.
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