Lower indicators are technical analysis tools that appear in separate panels below the price chart, providing insights into momentum, strength, volume, and market sentiment without cluttering the price action. These oscillating indicators typically move between defined ranges or around zero lines, making it easy to spot overbought and oversold conditions, divergences, and trend changes. For option traders, lower indicators excel at timing entries and exits by revealing when a stock is stretched too far in one direction or when momentum is shifting – critical information for selling premium at optimal levels or avoiding trades against hidden weakness.
Common Lower Indicators
- Relative Strength Index (RSI) – Measures momentum by comparing the magnitude of recent gains to recent losses, oscillating between 0 and 100 with 70 indicating overbought and 30 indicating oversold. Option sellers love RSI for timing premium sales – selling puts when RSI dips below 30 and selling calls when RSI exceeds 70 provides a statistical edge. Divergences between RSI and price often warn of impending reversals before they show up in price action.
- MACD (Moving Average Convergence Divergence) – Shows the relationship between two moving averages (typically 12 and 26 period) with a signal line and histogram displaying momentum shifts. When the MACD line crosses above the signal line, it suggests bullish momentum for put sellers; crosses below favor call sellers. The histogram’s expansion and contraction reveals whether momentum is accelerating or waning, helping time option entries.
- Stochastic Oscillator – Compares the closing price to the price range over a specific period, showing where price sits within the recent range on a 0-100 scale. Fast stochastics (usually %K and %D lines) give quick signals while slow stochastics smooth out false signals, with readings above 80 suggesting overbought and below 20 indicating oversold. Option traders often wait for stochastic lines to cross in extreme zones before selling premium for higher probability trades.
- Volume – The most basic yet crucial indicator showing the number of shares traded, confirming or questioning price movements. Heavy volume on breakouts suggests continuation while light volume warns of false moves, helping option traders avoid selling premium against strong trends. Volume spikes often occur at turning points, marking capitulation bottoms perfect for put selling or blow-off tops ideal for call selling.
- Average True Range (ATR) – Measures volatility by calculating the average range between high and low prices over a specific period, showing how much a stock typically moves. Option sellers use ATR to set strike distances – placing strikes beyond 1-2x ATR reduces assignment probability while capturing decent premium. When ATR expands, option premiums increase; when it contracts, premiums shrink, guiding when to be aggressive or conservative.
- On Balance Volume (OBV) – Cumulative indicator that adds volume on up days and subtracts volume on down days, revealing whether volume supports the price trend. Divergences between OBV and price warn of potential reversals – if price makes new highs but OBV doesn’t, call sellers take notice. The indicator’s simplicity makes it effective for confirming whether big money is accumulating or distributing shares.
- Commodity Channel Index (CCI) – Measures deviation from the average price, oscillating above and below zero with extreme readings beyond ±100 indicating overbought or oversold conditions. Unlike RSI which is bounded, CCI can reach extreme levels during strong trends, helping identify when moves are overextended. Option traders use CCI spikes above +100 to sell calls and drops below -100 to sell puts, especially when combined with other indicators.
- Williams %R – Shows where the current price sits relative to the highest high over a lookback period, displayed as a negative oscillator from 0 to -100. Readings above -20 indicate overbought conditions while below -80 suggest oversold, essentially an inverse stochastic with similar applications. The indicator excels at identifying short-term reversals, making it popular for weekly option traders seeking quick premium decay.
- Money Flow Index (MFI) – Combines price and volume to create a momentum oscillator that measures buying and selling pressure, often called the volume-weighted RSI. Readings above 80 suggest overbought conditions with heavy selling pressure building, while below 20 indicates oversold with buying pressure emerging. Option sellers use MFI divergences as early warning signals, especially valuable because it incorporates volume unlike standard RSI.
- Chaikin Money Flow (CMF) – Measures the amount of money flow volume over a specific period, oscillating above and below zero to show accumulation versus distribution. Positive CMF indicates buying pressure and supports bullish strategies like put selling, while negative CMF suggests distribution favoring call sales. The indicator helps confirm whether price moves have institutional support or are retail-driven noise.
- Rate of Change (ROC) – Simple momentum oscillator that measures the percentage change in price between the current period and a specified number of periods ago. Zero line crosses signal momentum shifts while extreme readings warn of unsustainable moves ripe for premium selling. The indicator’s percentage-based calculation makes it easy to compare momentum across different priced stocks.