Volume is the most fundamental market indicator, showing the total number of shares traded during a specific period and appearing as vertical bars in a lower indicator panel beneath the price chart. Unlike other technical indicators that derive from price calculations, volume represents actual market activity – real money changing hands between buyers and sellers. For option traders, volume confirms or contradicts price movements, reveals institutional activity, and identifies exhaustion points perfect for selling premium. Understanding volume patterns helps avoid selling options against genuine breakouts while capitalizing on false moves that lack conviction.
How Volume Works
Volume displays as bars in the lower indicator panel:
Basic Volume Display
- Green/White bars: Price closed higher than open
- Red/Black bars: Price closed lower than open
- Bar height: Number of shares traded
- Time period: Matches chart timeframe
Each bar represents actual trading activity.
Reading Volume Patterns
High Volume:
- Above average activity
- Institutional participation
- Important price levels
- Trend confirmation
Low Volume:
- Below average activity
- Lack of conviction
- Potential false moves
- Holiday/summer doldrums
Average volume provides the baseline for comparison.
Volume Moving Averages
Adding context to raw volume:
Common Volume MAs
- 20-period: Short-term average
- 50-period: Intermediate average
- Volume spike: 2x+ average volume
- Volume dry-up: <50% average volume
These help identify unusual activity.
Using Volume MAs
Above Average Volume:
- Confirms breakouts/breakdowns
- Validates trend moves
- Suggests continuation
- Avoid fading these moves
Below Average Volume:
- Questions sustainability
- False breakout potential
- Reversal candidates
- Good for selling premium
Classic Volume Patterns
Key patterns in this lower indicator:
Volume Climax
Selling Climax (Capitulation):
Buying Climax (Exhaustion):
Climax often marks reversals.
Volume Divergence
Price Up, Volume Down:
Price Down, Volume Down:
Accumulation/Distribution
Accumulation (Smart money buying):
- Higher lows on price
- Increasing volume on up days
- Decreasing volume on down days
- Bullish – sell puts on pullbacks
Distribution (Smart money selling):
- Lower highs on price
- Increasing volume on down days
- Decreasing volume on up days
- Bearish – sell calls on rallies
Volume for Breakout Confirmation
Critical for option sellers:
True Breakout Characteristics
- Volume 2-3x average
- Sustained high volume
- Follow-through days
- Don’t sell options against these
False Breakout Characteristics
- Average or below volume
- Single day spike only
- No follow-through
- Perfect for selling premium
Example Analysis: Stock breaks resistance at $50:
- Volume only 1.2x average
- Next day volume drops
- Price stalls at $51
- Sell $52 calls with confidence
Volume Indicators
Advanced volume studies in lower panels:
On Balance Volume (OBV)
- Cumulative volume indicator
- Adds volume on up days
- Subtracts on down days
- Shows accumulation/distribution
Volume Profile
- Shows volume at price levels
- Identifies high volume nodes
- Reveals support/resistance
- Not time-based
Money Flow Index
- Volume-weighted RSI
- Combines price and volume
- Better overbought/oversold signals
- 0-100 oscillator
Volume for Options Timing
Using this lower indicator for entries:
Put Selling Opportunities
High Volume Reversal:
- Stock drops 5% on huge volume
- Next day inside bar, lower volume
- Selling exhaustion evident
- Sell puts below spike low
Low Volume Pullback:
- Stock in uptrend pulls back
- Volume dries up on decline
- No real selling pressure
- Sell puts at support
Call Selling Opportunities
High Volume Spike:
- Stock gaps up on news
- Massive volume first hour
- Price stalls, volume fades
- Sell calls above highs
Low Volume Grind Higher:
Intraday Volume Patterns
For weekly option traders:
Time-Based Volume
- First 30 minutes: Often highest
- Midday: Usually lowest
- Final hour: Second surge
- Close: Position squaring
Plan entries around these patterns.
Volume Weighted Average Price (VWAP)
- Average price weighted by volume
- Institutional benchmark
- Acts as support/resistance
- Sell calls above, puts below
Common Volume Mistakes
Ignoring Volume: Price without volume lies Absolute Numbers: Use relative comparisons Single Bar Focus: Look at patterns No Context: Consider news/events
Building a Volume-Based System
Systematic approach using volume:
Volume Confirmation Rules
- Never sell puts after high volume breakdown
- Never sell calls after high volume breakout
- Always check volume on breakouts
- Favor selling premium on low volume moves
- Wait one day after volume spikes
Weekly Option Example
Monday screening:
- Find stocks up 3%+ Friday
- Check if volume was below average
- Confirm resistance overhead
- Sell calls Monday morning
- Low volume = false move
Volume and Market Conditions
Broader volume context:
Market-Wide Volume
- SPY volume reveals sentiment
- Low summer volume = choppy
- High volume = trending
- Adjust strategies accordingly
Sector Volume
- Compare stock to sector
- Relative strength/weakness
- Rotation identification
- Better option selection
Key Takeaways
Volume:
- Lower indicator showing share activity
- Confirms or questions price moves
- High volume = conviction
- Low volume = suspect
- Climax patterns mark reversals
- Essential for breakout analysis
- The market’s truth detector
Volume is the most honest indicator – it shows real money voting with conviction. As a lower indicator, it provides crucial confirmation for price action, helping option sellers avoid fighting genuine moves while capitalizing on weak ones. Master volume analysis to distinguish between moves worth respecting and those perfect for selling premium against. Remember: volume precedes price, making it invaluable for anticipating reversals and continuations.