10 Best Indicators for Options Trading in India (2024)

Options are a form of derivative contract that gives buyers of the contracts(the option holders) the right but not the obligation to buy or sell a security at the chosen price at some point in the future. Option buyers are charged an amount called a premium by the seller for such a right.

If the market price is unfavorable for option holders, they will let the option expire worthless and not exercise this right, ensuring that potential losses are not higher than the premium. On the other hand, if the market moves in the direction that makes this right more valuable, it makes use of it.

Options are generally divided intoCALL & PUTcontracts. With a call option, the buyer of the contract purchases the right to buy the underlying asset in the future at a predetermined price, called an exercise price or strike price.

With a put option the buyer acquires the right to sell the underlying asset in the future at the predetermined price.

However, to succeed in options trading, it is essential to understand market indicators that can help make informed trading decisions. In this article, we will discuss the best indicators for options trading in India.

1. Implied Volatility:-

Implied Volatility is a measure of the market’s expectations of the future price volatility of an underlying asset. It is calculated by taking the market price of an option and then working backward to determine the level of volatility the market is expecting. Implied volatility is a crucial factor in determining the price of the option.

The higher the IV, the higher the will be option premium, and vice versa. Traders use IV to evaluate whether an option is overpriced or underpriced compared with historical volatility.It is one of the best indicator for option trading.

2. Open Interest:-

Open Interest(OI) is the number of contracts outstanding for a particular option. It represents the number of contracts that have not been exercised, closed, or expired.OI is a useful indicator for options traders as it helps them to understand the market sentiment. It is one of the best indicator for option trading.

If OI is increasing along with the price of an option, it indicates that traders are bullish on that stock or index. On the other hand, if OI is increasing but the price of an option is decreasing, it indicates that traders are bearish.

3. Volume Option:-

Volume is the total number of contracts that have been traded during a given period. It is an important indicator as it helps traders to determine the liquidity of a particular option.

High volume indicates that there is significant interest in that option, and it is easier to enter and exit a position. Conversely, low volume indicates that there is less interest and it may be difficult to buy or sell options. It is one of the best indicators for option trading.

4. Moving Average:-

Moving averages are a popular technical analysis tool used to identify the market. A moving average is a calculation that averages out the price of an underlying asset over a specific period. Traders use moving averages to identify support and resistance levels and to determine the overall trend of the market.

Amoving average crossover is a popular trading strategy, where traders look for the intersections of two moving averages as a signal to enter or exit a trade. It is one of the best indicators for option trading.

5.Relative Strength Index(RSI):-

Relative Strength Index(RSI) is the momentum oscillator that measures the speed and change of price movements. It is a popular indicator used by traders to identify overbought and oversold conditions in the market. When the RSI is above 70, it is considered overbought and when it is below 30, it is considered oversold. Traders use this information to enter or exit the trade. It is one of the best indicator for option trading.

6. Bollinger Bands:-

Bollinger Bands are another popular technical analysis tool used by traders to identify trends and volatility. They consist of three lines-the middle line is a moving average and the upper and lower bands are two standard deviations away from the middle line. The bands expand and contract based on the volatility of the underlying asset. It is one of the best indicators for option trading.

When the price of an asset moves toward the upper band, it indicates that the asset is overbought, and when it moves to the lower band it indicates that the asset is oversold.

7. Intraday Momentum Index (IMI):-

The Intraday Momentum Index is a good technical indicator for high-frequency option traders looking to bet on industry moves. It combines the concepts of intraday candlesticks and RSI, thereby providing a suitable range similar to RSI for intraday trading by indicating overbought and oversold levels.

Using IMI an options trader may be able to spot potential opportunities to initiate a bullish trade in an up-trending market at an intraday correction or initiate a bearish trade in a down-trending market at an intraday price bump.

8. Money Flow Index (MFI):-

The Money Flow Index is a momentum indicator that combines price and volume data. It is also known as volume-weighted RSI. The MFI indicator measures the inflow and outflow of money into an asset over a specific period (typically 14 days) and is an indicator of trading pressure.

A reading over 80 indicates that a security is overbought, while a reading below 20 indicates that the security is oversold. When the MFI moves in the opposite direction as the stock price, this can be a leading indicator of a trend change. It is one of the best indicator for option trading.

9. Put-Call Ratio (PCR) Indicator:-

The put-call rato measures trading volume using put options versus call options. Instead of the absolute value of the put-call ratio, the changes in its value indicate a change in overall market sentiment. It is one of the best indicator for option trading.

When more calls are being bought than puts, the ratio is above 1, indicating bullishness. When the put volume is higher than the call volume, the ratio is less than 1, indicating bearishness.

However, traders sometimes view the put-call ratio as a contrarian indicator, opting to trade against market trends in the hope of an impending reversal.

10.Supertrend indicator:-

It is a trend following indicator. The Supertrend indicator works for future, forex and equities. You can run it every 15 minutes, hourly weekly, or daily.

The super trend indicator is plotted in stock price charts for investors and highlights prominently visible trends that are shown in red when prices have dipped and green when prices have risen.

This indicator works on only two parameters.

1.Periods:-Traders usually use 10 periods-Average True range number of days(ATR-yet another indicator that gives you market volatility value by decompressing the range of prices of a security for a particular time.

2.Multiplier:-Amultiplier is a value by which ATR would be multiplied.

ATR plays a crucial role in this indicator since it is used to compute a value, and based on that the degree of price volatility can be tracked. In all these are too complex, you do not have to worry, systems and screeners are now equipped to do the math for you in seconds.

Conclusion:-

Indicators are statistics used to measure current conditions as well as to forecast financial or economic trends. In the world of investing, indicators typically refer to technical chart patterns deriving from the price, volume, or open interest of a given security.

t's a quantitative tool that is used by traders and investors in the stock market to predict the future movement of an underlying asset. Indicators show the current top gains and losses in stocks as well as in indices so that one can forecast the market movements.