If you think the market is likely to reverse direction, you can sell options to collect a maximum amount of premium. The idea is to sell calls just before an uptrend ends or to sell puts immediately before a downtrend ends. One approach is to sell options one standard deviation out-of-the-money (OTM) in hopes it will reverse direction before reaching the strike price.

To find potential reversal points, this Options Lab uses the Relative Strength Index (RSI), a momentum oscillator developed by J. Welles Wilder. The RSI compares the magnitude of a market’s recent gains and losses. Its values range from zero to 100 — low values represent possible oversold markets, and high values represent potential overbought markets.