Say, what? Yep, keep it simple stupid, and use the relative strength indicator.

Could it be so simple? Remember the KISS method-another form of the "razor of Ocam (usually the simplest explanation is the best)? Pete Stolcers of 1option.com hit me in the sweet spot when he talked about using comparative RSIs to make stock option trades. I like his strategy and have used it successfully many times. I guess I don't use it all the time because I don't seem to be able to convince myself that it should be that easy. I guess it just makes too much sense and being a contrarian, you know what that means.

As you recall, the relative strength indicator (RSI) measures sentiment by looking at the relationship between gains and losses. The principle is that when there's a high proportion of daily movement in one direction-either up or down- it can suggest an extreme condition and prices are likely to reverse. If RSI is above 80%, this normally indicates an overbought situation and stock prices are likely to reverse as the volume reduces and traders take profits. The reverse is true if RSI is below 20% as this normally indicates an oversold condition and buyers may soon take advantage of low prices and move into a long position.

What Mr. Stolcers proselytizes is that RSI can be used to determine strong and weak stocks in comparison to the RSI of the market in general.

Stolers first framed this strategy within the context of a sideways moving market as indicated by looking at the SPY (S&P500 Index ETF) RSI. He then contrasted this to a stock with an increasing RSI and one with an RSI decreasing relative to the SPY. He used this as an indication of weak and strong stocks relative to the general market. He then purchased a call option on the strong stock and a put option on the weaker stock. If the SPY RSI moved to a more oversold condition, he had a high probability of making money on the put option and if SPY moved up, the probability switched to the call option. Let's call it an "RSI option spread." A very simple strategy, indeed. KISS. Of course choosing the right strike price and expiration month can complicate things a bit, but you get the picture.

That brings up a little talked about factor....looking for delta. You remember delta, one of the famous stock option Greeks. Delta, as you may recall, measures the correlation between the movement of the particular option expiration month and strike price and the movement of the underlying stock. A high stock option delta means a close relationship. For instance, a delta of .60 means that if the underlying stock goes up one dollar, the option premium goes up sixty cents. As delta is a derivative of the Black-Scholes formula and there are many option value calculators and stock option software programs available. It's a plug and chug sort of thing, so don't be intimidated. There are even some stock option trading websites that provide current data and charts on the subject.

I like the RSI strategy system because sentiment drives prices. Sentiment in terms of markets and stocks is a cocktail of logic, statistics, and special knowledge of the industry or company. All these things can influence sentiment strong enough to forge a financial commitment, also known as pulling the trigger.

As always, before you try out a new system, do at least 50 or more paper trades.

To learn more about trading options, take advantage of Options University to give you the education on everything you need to know about options-from basic to master.