Upper indicators are technical analysis tools that appear directly on the price chart, overlaying the candlesticks or bars to provide visual context about trend, support, resistance, and volatility. Unlike lower indicators that oscillate in separate panels below the chart, upper indicators interact directly with price action, making them invaluable for identifying key levels for strike selection and timing option trades. These visual tools help option traders spot potential reversal points, confirm trends, and identify when volatility is expanding or contracting – all crucial factors for successful premium selling or buying strategies.
Common Upper Indicators
- Moving Averages – Smooth out price action to reveal the underlying trend by calculating the average price over a specific number of periods. Option traders use moving averages to identify support and resistance levels for strike selection, with popular periods being 20, 50, and 200 days. The slope and position relative to price help determine whether to focus on selling puts (uptrend) or calls (downtrend).
- Bollinger Bands – Create a dynamic envelope around price using a moving average and standard deviations to visualize volatility expansion and contraction. When bands squeeze tight, option buyers prepare for breakouts with low IV, while band touches often signal overbought/oversold conditions perfect for premium sellers. The bands adapt to market conditions, widening during volatile periods and narrowing during quiet consolidation.
- Support and Resistance Lines – Horizontal lines marking price levels where stock has historically reversed or paused, acting as psychological barriers. These levels guide strike selection by providing buffer zones – selling puts below support or calls above resistance increases probability of success. The more times a level is tested, the stronger it becomes until eventually broken.
- Trend Lines – Diagonal lines connecting swing highs or lows that define the direction and boundaries of price movement. Rising trend lines act as support for selling puts, while falling trend lines provide resistance for selling calls. When price approaches these lines, option traders prepare for either continuation or reversal setups.
- Price Channels – Parallel trend lines that contain price action, creating a trading range with clear upper and lower boundaries. Option sellers target the extremes – selling calls near the upper channel line and puts near the lower channel line for high-probability income trades. Channels work until they don’t, so always monitor for breakouts.
- Fibonacci Retracements – Horizontal lines at key percentages (23.6%, 38.2%, 50%, 61.8%) of a price move, based on mathematical ratios found throughout nature. These levels often act as support or resistance during pullbacks, helping option traders identify where a retracement might end and the primary trend resume. The 50% and 61.8% levels are particularly watched for reversal opportunities.
- Ichimoku Cloud – A comprehensive system that shows support, resistance, trend direction, and momentum all in one indicator using multiple calculated lines and a shaded “cloud” area. When price is above the cloud, focus on bullish strategies like selling puts; when below, bearish strategies like selling calls dominate. The cloud itself projects future support and resistance levels, unique among indicators.
- Pivot Points – Calculated levels based on the previous period’s high, low, and close that project potential support and resistance for the current period. Day traders love these for intraday option trades, while weekly and monthly pivots guide longer-term strike selection. The central pivot point often acts as a fulcrum between bullish and bearish bias.
- Volume Profile – Shows the amount of trading volume at each price level as a horizontal histogram on the chart, revealing where the most business was done. High-volume nodes act as magnets and support/resistance, while low-volume areas are prone to quick moves. Option traders avoid selling strikes within low-volume gaps where price can slice through rapidly.
- Parabolic SAR – Places dots above or below price to indicate the current trend and potential reversal points, switching sides when momentum shifts. When dots flip from above to below price, it signals a potential trend change from bearish to bullish, alerting option traders to adjust strategies. The indicator works best in trending markets but gives false signals during choppy consolidation.