How to Analyze Volume and Option Flow

12/14/2015 8:00 am EST

Focus: OPTIONS

Bob Lang

Founder and Chief Analyst, Explosive Options

Bob Lang, of ExplosiveOptions.net highlights two indicators he has found to be indispensable guides to his success as an options trader, trading volume and diagonal LEAP strategies.

As a technician, I always have one eye trained on several indicators. They are indispensable guides for my success as an options trader, which is why I blog and talk about them so much. Because I already covered two favorites—sentiment and volatility—it was time we focused on two more: trading volume and diagonal LEAP strategies.

During this options trading webinar, I shared my tips on how to analyze both. We started by talking about the current market malaise, where price action has been quite poor and stocks are struggling to find direction. Perhaps it’s a pause in front of the Fed meeting next week, which makes sense, nobody seems to know what is going to happen. To be sure, volatility is elevated just in case, but more than likely we’ll see that volatility start to decline once the news is out.

I talked about the importance of volume and paying attention, especially to big volume situations. Turnover, or volume, is the polygraph of the markets, they tell us exactly what is happening (buying or selling and the level of commitment involved). Volume almost always precedes price.

In addition, I mentioned some interesting diagonal LEAP strategies using Netflix (NFLX) and the diagonal calendar as an example. Netflix has set us up to get long a LEAP and cut risk by selling a shorter-term call, perhaps even taking the entire amount of risk off the table.

This Week’s Market Action

After rising last week on a decent jobs report, markets have resumed their slide down on some decent volume. Low crude oil prices caused by decreased demand is to blame. Meanwhile, the VIX rose on poor economic news from Europe and China. Puts and calls are running hot, the McClellan oscillators are oversold, and breadth is horrible. From where I sit, it seems like the markets are waiting for news to shake things up. Could the Fed’s two-day meeting be the catalyst?

By Bob Lang of ExplosiveOptions.net

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