Which Indicator is Best for Option Trading in TradingView?

Why You’ve Been Using the Wrong Indicator for Option Trading (and Didn’t Even Know It)
You’ve been there. A gut feeling that an option trade is about to make or break you. You think you’ve picked the right indicator, but something doesn’t quite fit. You might have asked yourself: “What am I missing?” The truth is, most traders are using the wrong indicators for options. While popular indicators like the Relative Strength Index (RSI) or Moving Averages (MA) are great for stocks, they often miss key metrics for options.

The Hidden Reality of Option Volatility

Let’s get this straight: options are all about volatility, not just price direction. If you’re simply using indicators built for price trends, you’re ignoring the very DNA of options trading. A classic example is the misunderstanding around volatility-based indicators. Options traders need something more dynamic, more responsive to market movements. And this is where indicators like Implied Volatility (IV) Percentile and IV Rank come into play.

Implied Volatility gives you a real sense of whether an option is cheap or expensive compared to historical data. Are we at a high or low point in volatility? That could determine whether you’re making or losing money. Let’s say you’re considering a call option on Tesla, and the IV Rank is sitting at 85%. This tells you that volatility is higher than it’s been 85% of the time over the last year—a signal that you might be overpaying for that call option.

The Role of Open Interest and Volume

Everyone loves to talk about volume, but not enough people dive into Open Interest (OI). OI helps you figure out whether a market is liquid enough for your strategy to work. An option might have high volume, but if the OI isn’t there, you could struggle to exit your position. You’re essentially fighting the tide. In contrast, a high OI means you’re swimming with the current, and you’ll likely get the price you want.

Now, let’s blend this with volume. Imagine you see a sharp spike in volume without a corresponding rise in OI. That’s a red flag. It means that traders are likely just flipping contracts, and those moves might not have staying power.

Combining Indicators: A Recipe for Success

The power in option trading comes from using multiple indicators together, like building layers on a cake. Imagine using Bollinger Bands in combination with Implied Volatility Percentile. You’re not just looking at price action within standard deviations; you’re also assessing whether you’re entering the trade at a period of heightened or diminished volatility.

For instance, Bollinger Bands can signal when an asset is overbought or oversold. But on their own, they lack the volatility context that options demand. Overlay them with IV Percentile, and suddenly you’ve got a richer view of the market. Is the stock trading outside its band at a time of extremely high volatility? If so, maybe you hold back on that trade.

The Lesser-Known Gem: Volume-Weighted Average Price (VWAP)

A pro-tip many traders overlook is the Volume-Weighted Average Price (VWAP). While more commonly used in day trading, VWAP can give you a crucial snapshot of the price action in relation to volume, helping you decide when to jump in or out of a position. In options trading, VWAP provides insight into whether institutions are participating in the trade. A stock trading below VWAP might signal that institutional investors aren’t buying in, giving you a heads-up to reconsider your move.

What About Greeks? Delta, Gamma, and the Rest

No conversation about option indicators is complete without mentioning the Greeks. But let’s not pretend that every trader fully understands Delta, Gamma, Theta, and Vega. Here’s the deal:

• Delta tells you how much the option’s price will move with the stock price. But for many traders, Delta becomes more crucial when you’re deep in the money. It’s less useful as an indicator of direction early in a trade.
• Gamma measures how much Delta changes with each point move in the underlying stock. High Gamma trades can be thrilling, but also incredibly dangerous if you’re not careful.
• Theta represents time decay, which is critical for short-term option traders. The closer you are to expiration, the faster the option loses value.
• Vega is all about volatility sensitivity. When Vega is high, you know that the option’s price will respond dramatically to changes in volatility.

Each of these factors plays into whether your trade will succeed, but many novice traders overlook them. A solid strategy often involves combining the Greeks with volatility and price trend indicators to create a holistic picture.

The Indicator You’re Not Using: The Put/Call Ratio

Here’s a big one that you probably haven’t thought much about: the Put/Call Ratio. This indicator gives you a snapshot of market sentiment by comparing the number of puts (bearish) to calls (bullish). When the ratio spikes, it suggests that traders are leaning bearish—an opportunity for contrarians to think about going long.

Let’s say the Put/Call Ratio is sitting at 1.2. That means more traders are betting against the stock. But savvy traders know that extreme sentiment often reverses, meaning a contrarian bullish trade might pay off handsomely. Combined with indicators like RSI or Bollinger Bands, you could identify a strong entry point that others are too scared to touch.

One Indicator Won’t Do It: You Need a Toolkit

Here’s the kicker: no single indicator is a silver bullet. The best option traders don’t rely on one tool to make their decisions; they blend several. You might use IV Percentile for volatility, Delta for sensitivity to stock movement, and VWAP for price-action insight—all together, they give you a 360-degree view of the trade.

So, what’s the best indicator for option trading? There isn’t just one. It’s about combining the right tools for your strategy. Ignore this at your own peril, because in the world of options, nuance is everything.