Options trading can be an exciting way to potentially profit from price movements in the financial markets, however, it's also complex and requires a solid understanding of the market. To navigate the world of options effectively, traders need to perform in-depth market analysis to make informed decisions. Whether you're a beginner or an experienced trader, knowing how to analyse the market for options trading can help you minimise risks and maximise opportunities.
In this blog post, we’ll break down the main areas of market analysis for options trading into six crucial parts that every trader needs to consider. Understanding these areas will give you a stronger foundation, increase your chances of finding opportunities and provide you with an overall picture of the options you are interested in trading.
1. Technical analysis: Decoding price movements
One of the main methods used to analyse the market is technical analysis. This approach focuses on studying the historical price movements of a stock or underlying asset to predict future movements. For options traders, technical analysis is very important, as the price movement of the underlying asset directly impacts the value of an option.
Some key elements of technical analysis include:
Charts: These are visual representations of a stock’s price movements over time. Candlestick charts are particularly useful for options traders because they provide insights into short-term price action and trends.
Indicators and oscillators: Commonly used technical tools like Relative Strength Index (RSI), Moving Averages (MA), and Bollinger Bands help assess whether an asset is overbought, oversold, or in a potential breakout zone. These indicators can guide you in choosing the right strike prices and expiration dates for your options.
Volume analysis: Volume refers to the number of shares traded. High volume indicates increased interest, while low volume may suggest a lack of confidence. Combining price action with volume can help confirm trends and breakouts.
Technical analysis offers a way to anticipate where prices may be headed based on past performance, which is crucial when you're considering options contracts with specific strike prices and expiration dates.
2. Fundamental analysis: Understanding the bigger picture
Fundamental analysis is essential for understanding the long-term potential of an asset, rather than the short-term potential that technical analysis provides. Fundamental analysis looks at the overall health of the company or asset that underlies the option. Understanding the company's history and financial records ensures that you as a trader are well-informed about the company's performance both financially and socially, its philosophy and its structure, and in turn, you can see any potential for upside opportunities or declines. Fundamental analysis takes a look at the bigger picture, which can guide your options strategy even further.
Some key elements of fundamental analysis are listed below:
Earnings reports: Corporate earnings reports provide critical data, including revenue, profits, and growth rates. Strong earnings can drive the price of a stock upward, benefiting call options. However, disappointing earnings can have a negative impact, benefiting put options. TigerGPT^ can assist you with finding earnings reports and financial summaries, the platform also offers users access to filings and company reports.
Source: Nvidia (NVDA) fillings, Tiger Trade app as of 28th January 2025.
Financial ratios: Understanding and reviewing key metrics like the Price-to-Earnings (P/E) ratio, Debt-to-Equity ratio, and Return on Equity (ROE) give traders insight into a company’s financial health, helping to gauge whether the stock is overvalued or undervalued.
News and events: Mergers, acquisitions, new product launches, changes in senior management, and regulatory changes can all influence a stock's value. Fundamental analysis provides forward guidance and helps you keep track of major market-moving events that could impact the prices of options.
3. Sentiment analysis: The psychology of the market
Market sentiment refers to the overall feeling or attitude of traders and investors toward a particular stock or the market as a whole. Rather than just looking at the data, sentiment indicators look at consumer behaviour and beliefs that may influence the market. Sentiment is driven by emotions such as greed, fear, optimism, and pessimism. These factors can significantly impact price movements in the short term. Being able to interpret and understand market sentiment helps traders make decisions based on broader moods and potential price swings. Generally speaking, when a sentiment indicator moves in the same direction as what it is analysing, this typically confirms a trend.
To gauge market sentiment, keep an eye on:
News sentiment: The tone of news stories and reports can drive the mood of the market. A positive earnings report or a favourable government policy might spark optimism, driving prices higher. Conversely, bad news can create fear and lead to sharp declines. For instance, let's take the DeepSeek Ai assistant launch as an example. This drove down the price of stocks such as Nividia and other US Tech-stocks.
Social media and forums: Platforms like Twitter, Reddit (particularly r/WallStreetBets), and other social media sites have become key sources for gauging market sentiment. A sudden surge in online discussions or “hype” surrounding a stock can signal increased interest, which might affect the price and, consequently, options contracts. For instance, think about meme stock examples such as GameStop, one post from "Roaring Kitty" and the [temporary] impact this had on the market, causing the fluctuation in stock prices due to the "hype" created. This type of hype can cause unreasonable fluctuations in the price of a stock and therefore should be taken into careful consideration when trading options.
Volatility indices: The VIX (Volatility Index) measures investor fear and the level of market volatility. A high VIX suggests that investors are nervous, while a low VIX indicates calm market conditions. This can be crucial for options traders, as volatility directly affects the pricing of options premiums.
4. Implied Volatility: Anticipating market uncertainty
Implied volatility (IV) is a critical factor in options trading as we have previously mentioned throughout this blog series. It represents the market's expectations of future price volatility of an underlying asset and is a key determinant of options pricing.
High IV: When implied volatility is high, options premiums tend to increase because the market expects significant price movement in the near future. For options traders, this can signal the potential for larger gains (but also increased risk).
Low IV: When implied volatility is low, options premiums decrease, making them more affordable. However, low volatility might also indicate a lack of major price movement in the short term, which may reduce profit opportunities for certain options strategies.
Traders often use implied volatility to assess whether options are overpriced or underpriced. For example, if you expect volatility to increase but the implied volatility is low, you might consider buying options to capitalise on the anticipated price swings.
5. Economic indicators: The macro landscape
Market conditions are influenced by broader economic factors. While these might not impact short-term options trading directly, they can have a significant effect on the underlying stock over time. By paying attention to macroeconomic factors, options traders can align their strategies with broader market trends and anticipate potential shifts in underlying stock prices.
Important economic indicators include:
Interest rates: Changes in interest rates by central banks, like the Federal Reserve, can affect the cost of borrowing and influence investor behaviour. Rising interest rates can often lead to lower stock prices, impacting the value of options.
Economic reports: Reports such as the Consumer Price Index (CPI), Gross Domestic Product (GDP) growth, and employment data provide insights into the health of the economy and can in turn move markets. Positive reports can boost stock prices, while negative reports can depress them.
Global events: Political events, trade tensions, natural disasters, or geopolitical instability can create uncertainty in the markets, leading to increased volatility and price swings. For instance, in 2022 when the Russian and Ukrainian war erupted the prices of commodities like wheat rose over 60% because Russia and Ukraine were global leaders in wheat production, and this in turn affected the market.
6. Risk management: Protecting your portfolio
As previously mentioned in our blog on risk management, this is the key to long-term success in options trading regardless of the analysis methods you use. Trading options is complex and involves significant risk and without proper precautions, losses can accumulate quickly. Key risk management strategies for options trading include:
Stop-loss orders: Setting stop-loss orders allows you to automatically exit a position if the price moves against you, limiting potential losses. Stop-loss orders also mean you don't have to monitor your trading daily as you have already set the exit position.
Position sizing: Determine how much capital you're willing to risk on each trade and avoid over-leveraging. Diversifying your options positions across different assets can also reduce the impact of any single loss.
Hedging: Many traders use options to hedge their existing portfolio. For example, buying put options may be used in conjunction with a stock position from a potential downturn. However, this strategy carries its own risks and costs.
Market analysis is an essential skill to acquire for any options trader. Whether you're using technical analysis, fundamental analysis, sentiment indicators, or tracking economic factors, a comprehensive market analysis allows you to make more informed and strategic decisions. It's important to note that no single method guarantees success—combining multiple approaches, understanding implied volatility, and practising risk management will give you the best chance at navigating the unpredictability of options trading.
By mastering market analysis, you'll be able to approach options trading with confidence. Visit our Options Trading page on the website to explore more opportunities and tools to help assist you on your trading journey. Get 24/7 stock market news, financial summaries through TigerGPT^, in-depth market data and technical analysis. Join Tiger Trade and practice options trading with no real capital risk by using the Tiger Trade demo account. Plus, if you open an account, you'll get four $0 brokerage monthly trades on ASX US stocks & ETFs or US options.*
^TigerGPT is provided as a research tool and the accuracy of information generated is not guaranteed. It should not be deemed as investment advice nor relied upon to make any financial or investment decision.
*New clients & unfunded existing clients only. Only min. brokerage waived for 4 ASX, US stocks & ETFs or options trades. Third-party fees and other fees still apply. See T&Cs for details.
Capital at risk. Options trading carries a high level of risk and may not be suitable for all investors. You should only trade with money you can afford to lose. See FSG, PDS, TMD and T&Cs via our website before trading. Information provided may contain general advice without taking into account your objectives, financial situations or needs. Past performance is no guarantee of future results. Graphics and charts are for illustrative purposes only. Tiger Brokers (AU) Pty Limited. ABN 12 007 268 386 AFSL 300767
