It is the author’s belief that fundamental analysis can help option traders. While option traders typically rely on charts to predict price performance of the underlying security, it is important to understand that price changes as a result of a number of factors.
If a company has got 2 divisions and it’s stock market performance has not been exactly fruitful, a company may sell its assets of to recapitalize the firm. The company may pay down debt for a number of years, before eventually rewarding shareholders with a dividend.
The entire process described here will likely result in share price appreciation if the price of the company is especially cheap and undervalued. These corporate changes, recapitalization, changes in capital structure, resource conversion potential can only be found in the financial statements of the company, the underlying security. The charts may not tell a trader anything in such an instance, and all of a sudden, the underlying’s price shoots up significantly, resulting in a spike in the premiums of the call options.
Hence, with fundamental analysis, an options trader can detect changes in the underlying which are not noticeable in the stock market. The above scenario is but one instance of that. Options traders should have at least a basic understanding of the topics below and how they affect each other.