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4 Types Of Signals For Options In A Swing Trading Program

Every options trader faces the same dilemma: How can you get the maximum time before expiration, while also paying the lowest possible cost for the position?

The solution is to not make the mistake most long options traders make: speculating without an underlying signal. Options traders need to seek a few sensible signals to avoid this common dilemma. These include:

1. Reversals found in candlestick indicators and confirmed by secondary indicators, letting you time your trade to enter at the bottom of the swing (for long calls) or at the top of the swing (for short puts). If you do this, you don't need the time because you expect the price to react immediately. If you use this technique, you can also use options expiring in a month or less. This means there is little time value remaining, so the option will be cheap.

2. Reversal signals found in price patterns. Use Western technical signals like double tops or bottoms, head and shoulders, triangles or wedges, and strong price gaps. Also be aware that reversal is most likely to occur when price approaches or breaks through resistance or support. This is the best location for entry.

3. Reversal signals based on momentum oscillators. These are signals based on tracking of the strength or weakness in the current trend. Once signals move into overbought or oversold conditions, they provide strong reversal flags. That's the best time to act, as long as the oscillator confirms a separate signal.

4. Other reversal signals. Check volume and moving average signals as further types of reversals. These, like other reversal signals, may also provide confirmation.

The stronger a reversal signal and confirmation, the more confidence you may find in timing of entry and exit. All of these signals will be at their strongest when in close proximity to resistance or support.

In selecting options trades in response to strong reversal and confirmation, focus on opening long positions as close to the money as possible. Too much time value means even a profitable move may be offset by rapid time decay; and too much intrinsic value equals higher cost.

You do not have to live with the common time versus cost dilemma. You can manage trades to take advantage of time and proximity to improve entry and exit timing and to reduce the risk of loss in long options.

Michael Thomsett blogs at, CBOE Options Hub, and several other sites. He is author of 11 options books and has been trading options for 35 years. Thomsett Publishing Website