Warning

• Stock options are deceptively rewarding trading instruments. These are highly leveraged vehicles with some of the greatest volatility that the financial industry offers. A stock option is a special derivative contract that controls 100 shares of underlying stock. You can trade these contracts for relatively low prices when compared to the cost to outright purchase of 100 shares. However, the contracts still retain the profit and loss characteristics of 100 shares; thus the option's price can fluctuate dramatically.
  
  Traditional technical analysis that yields successful results with an underlying stock might not necessary be profitable with a stock option. Never assume that because a stock performs well, the option will also become profitable. Always test strategies using simulated portfolios before engaging stock options with real capital.
  
  

Dow Theory

• The most fundamental tenets of technical analysis for any form of investment were laid out nearly 100 years ago in the concept known as the Dow Theory. Very simply, the theory aimed to define what a "trend" actually is. The Dow Theory proposes that any price cycle that results in a pattern of higher highs and higher lows is in a trend. Price will always dip, but if they remain higher than the previous dip while continuing to place a new high, they are trending up.
  
  This basic technical analysis can be viewed online when studying the price chart of any stock at a major finance website, such as Google Finance. Stock options correspond to the price action of the underlying stock, so a stock option is best purchased when its related stock is clearly trending.
  
  

Greeks

• The "Greeks" refers to a set of unique quantifiable measurements of a stock option's pricing behavior. These numbers represent many complicated aspects of the option pricing model, but the most important of these is "theta." No technical analysis of options can be thorough without a consideration of what the option's theta represents. The theta value measures the loss that will always be subtracted from an option's value each day. A theta of .05, for example, means that the option will lose $5 each day if nothing else changes. All stock options gradually lose money through their theta values; however, other gains might compensate for these losses.
  
  Although technical analysis primarily studies price action, the theta value incorporates a powerful influence on the actual returns of an option position. A stock can rise modestly, but not enough to overwhelm the losses from the theta value. Thus, the stock option's value could decline despite the stock's rise.
  
  

Online Resources

• Those seeking methods for analyzing stock options online can turn to resources such as Schaeffer's Options Center, which provides the full Greek information for any stock option. Additionally, the site offers expert commentary by experienced option traders on the outlook for the stock option market overall. Online trading platforms, such as ETrade or TradeKing, also provide extensive technical analysis tools for the study of stock options.
  
  Remember that successful option trading requires not just a solid prediction of a stock, but also an understanding of how the option's Greeks will react. This is a two-part analytical approach that begins with the identification of a trending stock, followed by a study of at least the option's theta value. Additional Greeks can be scrutinized as your experience grows.
  
  

Advanced Charting

• Some online systems provide particularly robust tools for the technical analysis of stock options. TradeKing is an online broker specifically geared toward options traders, though other transactions are available as well, including conventional stock purchases. But TradeKing provides a library of features designed to simplify the process of measuring the Greeks. Even novices with little understanding of the complicated option pricing model will be able to clearly visualize the likely success of an option position based on these variables.
  
  Anyone who plans to commit serious capital to option trading should be as informed as possible. Options remain one of the best ways to lose money.