Why Using a Price Chart for an Option is a Waste of Time (and Possibly Brain Cells)

So, you want to trade options, and you’ve done your homework. You’ve read books. You’ve learned so much technical analysis that you’re waiting for an honorary CMT certificate. Now it’s time to put it into practice, so naturally, you fire up a chart. But you’ve made a rookie mistake: you’ve pulled up a price chart of an individual contract. You then proceed to squint at it like an ancient oracle reading goat entrails and start drawing lines to connect the blood streaks (too much?), and convince yourself you’re about to uncover the secrets of the market. I hate to be the one to break it to you, but you’re not. And if this is your trading strategy, your money would be better spent buying actual goat entrails and making a stew.

Using a price chart for an option is a fundamentally terrible idea for several reasons, which I will now explain in painstaking detail, because if I don’t, someone out there will absolutely try to argue that they have a special, magic system that “works.” Spoiler: It doesn’t.

1. Liquidity: Your Data is Garbage and So is Your Chart

Options markets are not like stock markets. Stocks have a centralized exchange, plenty of liquidity (unless you’ve gone down some meme-stock rabbit hole), and relatively tight bid-ask spreads. Options? Not so much. The average retail trader looking at an option chart is staring at price points built on inconsistent fills, wide spreads, and illiquidity.

If you’ve ever pulled up an options chain and seen a bid of $1.00 and an ask of $1.50, congratulations—you’ve just met the absurdity of trying to chart that nonsense. The price movement you see on an option’s chart is often based on single, sporadic trades rather than a true reflection of continuous buying and selling pressure. So when you’re getting excited about that “breakout” on your $2.00 strike call option, you might want to consider that the last trade was some poor soul who market-ordered into a terrible fill (it’s ok, we’ve all been there, most of us many times, and some of us even bought second homes there), and you’re about to follow them into the abyss.

Options pricing is not like stocks; it’s not set by direct supply and demand but rather by a pricing model and volatility. So unless you enjoy making decisions based on a meaningless collection of sporadic trades and bid-ask jumps, go ahead and close that chart. It’s lying to you.

2. It’s a Derivative: The Underlying is the Real Story

Options are derivatives. This is not a shocking revelation. The value of an option is not based on some mystical force lurking within its own price history; it’s based on the underlying asset and a pricing model that factors in volatility, time decay, and a handful of other elements that most people barely understand but pretend to. The movement of an option is tied to the movement of the underlying stock, not some imaginary support and resistance lines you’ve drawn on a chart that exists in its own reality.

If you want to understand the price action of an option, pull up the chart of the stock it’s based on. That will actually tell you something useful. Of course, that requires understanding how stocks move, why options pricing changes, and accepting the cold harsh reality that blindly throwing money at out-of-the-money calls won’t make you rich (unless it’s 2024). Self-improvement is a journey!

3. Technical Analysis Doesn’t Work on Derivatives

This one might hurt for those who have built an entire trading philosophy around Fibonacci retracements, MACD crossovers, and drawing too many triangles on charts (I knew a trader who quit the game and went to teach geometry at a local college because he was tired of drawing so many shapes.) The reality is that (too much) technical analysis is already questionable when applied to stocks, and when applied to options, it becomes a complete farce.

Technical analysis assumes that price action follows certain patterns based on past behavior. Whether or not that’s true for stocks is an ongoing debate, but for options? It’s straight-up delusion. The price of an option is influenced by multiple factors—underlying movement, implied volatility shifts, time decay, market sentiment—none of which are visible on the option’s own chart.

Think about it: A stock’s price can trend because of fundamental reasons—earnings, news, momentum, actual supply and demand. But an option? It’s literally priced based on a formula. The market doesn’t care what your RSI is saying on that random call option. The Greeks do not bow to your candlestick formations.

Trying to apply technical analysis to an option price chart is the equivalent of checking the mileage on a rental car to predict traffic conditions. There is no logical connection. If anything, you’d be better off spending your time learning how market makers price options rather than treating a contract’s price like it’s an independent entity. It isn’t. It never was.

What Should You Do Instead?

Alright, now that I’ve thoroughly demolished the idea of using option price charts, let’s talk about what actually makes sense.

1. Watch the underlying. This is what actually dictates your option’s movement. If you insist on doing technical analysis, at least do it on something relevant.
2. Understand implied volatility. IV is a massive driver of option pricing. If you don’t understand how it expands and contracts, you’re just guessing.
3. Learn what open interest and volume mean. Unlike stock charts, where price and volume tell a story, an option’s liquidity can impact pricing in ways that make technical analysis useless. High open interest and volume mean tighter spreads and better execution; low liquidity means erratic, unreliable price action.
4. Use the options chain. Looking at historical option prices is pointless. The current chain tells you all you need to know about real pricing, bid-ask spreads, and open interest.

Tough Love

If you’ve made it this far and you’re still thinking, “But I swear I’ve seen patterns on option charts before!”—let me save you some heartache. Coincidence does not equal causation. Options do not trade like stocks, and their charts do not carry predictive value the way you might hope.

There are already enough bad trading habits out there; let’s not add “reading option price charts” to the list. Save yourself the headache, look at the actual factors that drive option pricing.

Disclaimer: I do not use options charts (in case that wasn’t clear)