The Relative Strength Index (RSI) is one of the most powerful tools in a trader's arsenal, yet most traders fall into the "buy below 30, sell above 70" rookie trap. This episode shatters those simple ideas and reveals a sophisticated, actionable framework for using RSI to time high-probability options entries.

Learn the critical distinction that RSI measures momentum, not future price. We break down the five-step process that combines RSI with trend analysis (using tools like moving averages), support/resistance levels, and crucially, Implied Volatility (IV) to determine whether you should be buying options or selling premium. Stop fighting the freight train of a strong trend and start using RSI as the sophisticated momentum speedometer it truly is.

Resource Mentioned: Insights were drawn from sources like "RSI for Options: Timing Entries and Exits."

We’ve distilled the knowledge into a simple cheat sheet you can apply right away. Think about this: In any complex situation—not just trading—what three pieces of confirmation do you look for before making a big move?Subscribe now to the Options Trading Podcast to get more high-value, actionable trading frameworks!

Key Takeaways

• RSI is a Momentum Speedometer, Not a Crystal Ball: RSI (plotted on a scale of 0-100) measures the speed and magnitude of recent price changes. It does not predict the future. The classic trap is blindly trading against the trend when RSI hits extremes (above 70 or below 30), which is dangerous in strong trends (e.g., Tesla example staying above 70 for 15 days).
• The Five-Step Contextual Framework: For options, RSI must be used in context, combined with: 1) Trend Analysis (e.g., 50-day moving average), 2) Price Confirmation (bouncing off support/resistance), and 3) Implied Volatility (IV).
• Using RSI with Trend: In an uptrend, an RSI dip (maybe near 40) is often a "buy the dip" opportunity (a pullback), not a sell signal. Conversely, in a downtrend, an RSI pop (near 60-70) is often a chance to "sell the rally."
• RSI and Implied Volatility (IV) Dictate Strategy: When RSI hits an extreme (oversold), IV often spikes (High IV), making it ideal for selling premium (e.g., put spreads) to collect richer premiums. If IV is low, buying options (calls/puts) may offer better risk/reward.
• Advanced Techniques for Edge: Look for RSI Divergence (price makes a new high, but RSI makes a lower high, signaling fading momentum) and use Multi-Time Frame RSI alignment (e.g., Daily RSI oversold, Hourly RSI turning up) to sharpen entry timing.

"If you sold calls just because RSI hit 70 on day one, you'd be losing a lot of sleep and definitely a lot of money."

Timestamped Summary

• 0:16 - Debunking the classic "Buy below 30, Sell above 70" rookie trap.
• 2:00 - What RSI really is: A momentum speedometer, not a crystal ball.
• 5:30 - The Major Flaw: Strong trends ignore RSI extremes (the Tesla example).
• 6:45 - The 5-Step Smart Framework: Combining RSI with trend, levels, and volatility.
• 10:50 - Practical Example: Selling a Put Spread using RSI, Trend, and High IV.
• 13:50 - Advanced Edge: Using RSI Divergence and Multi-Time Frame Confirmation.
• 16:16 - The Critical Link: How RSI extremes dictate buying vs. selling options (IV).

Stop fighting the tape! Share this episode with a friend who still blindly trades the 30/70 rule. Follow our five-step playbook! Leave a review on Apple Podcasts and tell us which step you’ll implement first.

Support the show