What is Relative Strength Index (RSI)?

The Relative Strength Index (RSI) is a popular technical indicator used to identify whether an Option is overbought (price too high) and oversold (price too low). The RSI oscillates between 0 to 100. A value below 30 indicates that the Option contract is oversold whereas anything above 70 indicates overbought levels.

How is RSI calculated?

The Relative Strength Index (RSI) is calculated as:

RSI = 100 - 100 / (1 + RS)

Where RS = (Average gain / n) / (Average loss / n)

n= time frame

How to use RSI in Options Trading?

Traders use RSI to identify a trend in price movements of an Options and get buy/sell signals. If the RSI is above 70 then the Options is in an overbought territory and may see a reversal in price. An RSI below 30 indicates that the Options is undersold and may see an increase in price in the future.