I'm going to take you through my routine and thought processes when I'm looking to take an option trade. Even if you don't trade options, this analysis should help with analyzing and deciding whether to pull the trigger on any trade. I'm going to use the RTH as my example since I just picked up some contracts today.
The first step for me is spotting a price pattern on a daily chart from the hundreds of charts I pour over. Usually a 3-6 month chart provides these "pattern trained" eyes with plenty of opportunities. That gets the process started and gets me a candidate. In this case, RTH. The next step is to take a look at the 5 year weekly chart...
I'm looking for obvious areas of support and resistance. Not exact levels, but general areas that I can draw in with a crayon, not a pencil. I may draw some trendlines too, but I basically want to see if the big picture is accumulation or distribution. I can see from this chart that volume fell off rather dramatically on the recent climb and prices rolled over exactly where you'd expect given my support/resistance line.
The next step is the 2 year daily chart...
![](http://2.bp.blogspot.com/_X2UaspHv9WY/SlU2Wxkj0PI/AAAAAAAABkI/uZUo_kFXbmo/s400/rth2.png)
Next, I pull up the 1 year daily chart...
![](http://1.bp.blogspot.com/_X2UaspHv9WY/SlU2LA0RdEI/AAAAAAAABkA/oVEUgvNrrRs/s400/rth1.png)
Onto the 6 month chart...
![](http://1.bp.blogspot.com/_X2UaspHv9WY/SlU2AwUOJNI/AAAAAAAABj4/1B-w47A-VD8/s400/rth6.png)
Now it's time to zoom in on the 30 day, 30 minute chart...
![](http://4.bp.blogspot.com/_X2UaspHv9WY/SlU127p9oUI/AAAAAAAABjw/JWVdCmgfMbs/s400/rth30.png)
A few words of wisdom or random thoughts from experience...
When it comes to choosing an option, I'm almost always looking 1 strike out and making sure it's liquid. There's nothing worse than losing 20% on the way out because of a large spread. Buy enough time to profit from the expected move, but not too much time. Don't pay for more time than you need. The big picture always plays an important role as well... 3 out 4 stocks are going to follow the general markets. Swing trading options in a consolidating market will eat away at your portfolio, the big money is made within the trends. Closing prices are significantly more important than the intraday breaks of support and resistance... unless you're prepared to jump right back in, base decisions on the close! A high $VIX is more conducive to being an option seller rather than a buyer because options get more expensive as implied volatility rises. Remember that when the $VIX is above 70 and you're ready to buy calls because the bottom has arrived... you could be right and still lose money!!