Alert

On the road again! Join tastytrade vets Tom, Liz, and Jenny as they venture out live for the first time in over 2 years at Chicago's Vic Theatre.
tastytrade logo
The Skinny On Options MathRelative Strength Index | Feb 5, 2015
Up Next
    The Skinny On Options MathRelative Strength IndexFeb 5, 2015

    Relative Strength Index (also known as RSI) is all about comparing the average positive price changes of a stock or index to its average negative price changes.

    Traditionally, the price changes are calculated over 14 days, and the average picks up the current day and drops of the first day to create a rolling average. The relative strength is the positive average divided by the negative average, and the relative strike index is 100 – (100 / 1 + relative strength). That creates an index that always has a value between 0 and 100. When the positive price changes are larger than the negative price changes, the (relative strength index is high and above 50.

    When the negative price changes are larger than the positive price changes, the relative strength index is low and below 50. High RSI is often interpreted as the stock being “overbought” and more likely to see its price drop in the future.

    Low RSI is often interpreted as the stock being “oversold” and more likely to see its price rise in the future. Investors who use RSI set arbitrary high and low levels, often 70 and 30, above and below which the RSI is seen as a strong indicator of a price reversal.

    The way some investors use the relative strength index is to short stocks or indices whose RSI is over 70 and to buy stocks or indices whose RSI is below 30. The belief is that the price of the stock will not continue to move as strongly as it has higher or low, and will revert back to some lower or higher price.

    More like this

    tastytrade content is provided solely by tastytrade, Inc. (“tastytrade”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities can involve high risk and the loss of any funds invested. tastytrade, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors, and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastytrade is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparison, statistics, or other technical data, if applicable, will be supplied upon request. tastytrade is not a licensed financial advisor, registered investment advisor, or a registered broker-dealer. Options, futures and futures options are not suitable for all investors. Prior to trading securities products, please read the Characteristics and Risks of Standardized Options and the Risk Disclosure for Futures and Options found on tastyworks.com. 

    tastytrade is a trademark/servicemark owned by tastytrade.

    tastyworks, Inc. ("tastyworks") is a registered broker-dealer and member of FINRA, NFA and SIPC. tastyworks offers self-directed brokerage accounts to its customers. tastyworks does not give financial or trading advice nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastyworks’ systems, services or products. tastyworks is a wholly owned subsidiary of tastytrade, Inc (“tastytrade”).

    tastyworks, Inc. (“tastyworks”) has entered into a Marketing Agreement with tastytrade (“Marketing Agent”) whereby tastyworks pays compensation to Marketing Agent to recommend tastyworks’ brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastyworks. tastytrade is the parent company of tastyworks. tastyworks and Marketing Agent are separate entities with their own products and services. tastytrade has different privacy policies than tastyworks.

    Quiet Foundation, Inc. (“Quiet Foundation”) is a wholly-owned subsidiary of tastytrade The information on quietfoundation.com is intended for U.S. residents only. All investing involves the risk of loss. Past performance is not a guarantee of future results. Quiet Foundation does not make suitability determinations, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of Quiet Foundation’s systems, services or products.

    Small Exchange, Inc. is a Designated Contract Market registered with the U.S. Commodity Futures Trading Commission. The information on this site should be considered general information and not in any case as a recommendation or advice concerning investment decisions. The reader itself is responsible for the risks associated with an investment decision based on the information stated in this material in light of his or her specific circumstances. The information on this website is for informational purposes only, and does not contend to address the financial objectives, situation, or specific needs of any individual investor. Trading in derivatives and other financial instruments involves risk, please read the Risk Disclosure Statement for Futures and Options. tastytrade is an investor in Small Exchange, Inc.

    © copyright 2013 – 2022 tastytrade. All Rights Reserved. Applicable portions of the Terms of use on tastytrade.com apply. Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law, provided that you may download tastytrade’s podcasts as necessary to view for personal use.