Stock Options—How to Be Successful Using Technical Analysis

If you have joined any stock options seminar recently, you might have noticed the frequent mention of technical analysis. This term is also popular among trading blogs all over the Internet and for the right reason: you understand stock options and how to choose from among them through technical analysis.

The Difference Between Fundamental and Technical Analysis

So that we can understand how to pick the right options, we have to understand how to analyze it first. Without good analysis, it is as if, you are just throwing away your money. There are two main categories of analysis, namely, fundamental analysis and technical analysis.

Fundamental analysis

When you want to predict the future performance of great companies or its markets, you resort to fundamental analysis. In this case, you will be looking for fundamental data as loss and profit statements, earnings guidance and earnings growth and the like. The disadvantage of fundamental analysis is that even great companies experience downturn even for extended period of time and they don't always have great stocks.

Technical analysis

While you resort to fundamental analysis when you want to study the performance of a company, you resort to technical analysis when you want to study the exclusive performance of a stock. With technical analysis, you will deal with prices across different periods of time and volume transacted. Through this, you will know the performance of the stock regardless of the performance of the company and this will help you avoid those extended downturns that it experience.

Now why do you think that technical analysis is such a favorite among option traders? Well, you have  to remember, that fundamental analysis is favorable for long term investing while technical analysis is great for short term ones.

While stock traders can keep their stocks for like forever, options expire for a specific time period. In fact, options in most cases expire within a year and option traders often use strategies with short outlooks say, in weeks or months.

This is the primary reason why technical analysis is very important to stock options. Since they option traders don't have the luxury to hold their options for a long time, they need a way to study its performance at a very short period. In addition, as an option trader, you don't earn dividends similar to your stock trading counterparts. The only way for you to make money in option trading is when the outlook plays out within the period of expiration of your option.

This makes fundamental analysis unimportant to you as an option trader. Besides, you also make money when the when the stocks drop so all the more, identifying performing companies through the use of fundamental analysis becomes relatively unimportant to you.

I hope this explains why you need to understand technical analysis when you want to successfully choose stock options. For more information on this subject, don't hesitate to visit What If Options where you can find more trading tips and other relevant information.

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