Support & Resistance
Key price levels where buying or selling pressure tends to concentrate.
Support is a price level where a stock tends to stop falling because buying interest concentrates there. Resistance is a price level where a stock tends to stop rising because selling pressure kicks in. These levels form because traders remember prior prices — previous highs, lows, round numbers, and areas of heavy volume all create psychological and mechanical barriers that influence future price action.
Why It Matters
Support and resistance are the foundation of technical analysis. Every options strategy depends on predicting where price will or will not go by expiration. If you sell a put spread, you need price to stay above a support level. If you sell a call spread, you need price to stay below a resistance level. If you buy a straddle, you need price to break through one of these levels decisively.
Knowing where support and resistance exist gives you a framework for selecting strikes, setting targets, and managing risk. A credit spread with the short strike placed below a strong support level has better odds than one placed at a random price point. Support and resistance transform options trading from guessing to structured decision-making.
How It Works
How support and resistance form:
- Previous highs and lows: A stock that bounced at $90 three times in the past year has established $90 as support. Traders remember that level and buy there again.
- Round numbers: $50, $100, $200 — these are psychological barriers. Large volumes of limit orders cluster at round numbers.
- Volume nodes: Price levels where heavy trading volume occurred become support or resistance because many traders have positions anchored at those prices.
- Moving averages: The 50-day and 200-day SMAs act as dynamic support and resistance levels.
- Gap fills: When a stock gaps up or down, the gap often acts as a zone that price will eventually revisit and fill.
Key concepts:
- Role reversal: When support is broken, it often becomes resistance. When resistance is broken, it becomes support. This is one of the most reliable patterns in technical analysis.
- Zone vs. line: Support and resistance are better thought of as zones (price areas) rather than exact lines. A $2-3 zone around a key level is more realistic than expecting price to reverse at an exact penny.
- Strength of levels: A level tested and held multiple times is stronger. A level that held on high volume is stronger. A level visible on a higher timeframe (weekly/monthly) carries more weight than one seen only on a 5-minute chart.
- Breakout or bounce: Price either bounces off support/resistance (trade the range) or breaks through (trade the breakout). The outcome depends on momentum and volume.
Quick Example
A stock has resistance at $120 — it has been rejected there three times. You sell a call credit spread with the short call at $121 and the long call at $123, collecting $0.80. Price rallies to $119.50, stalls at the resistance zone, and retreats. Your spread expires worthless and you keep the full $0.80 credit. The resistance level gave you a high-probability placement for your short strike.