Even though Bollinger Bands can help generate buy and sell signals, they are not designed to determine the future direction of a security. Bollinger Bands serve two primary functions: to identify periods of high and low volatility and to identify periods when prices are at extreme, and possibly unsustainable, levels. Remember that buy and sell signals are not given when prices reach the upper or lower bands. Such levels merely indicate that prices are high or low on a relative basis. A security can become overbought or oversold for an extended period of time. So, if you´re a trader ... check if your Bollinger Bands are pinched. Bollinger Bands is a funny name (yes ...) but its an important indicator when you are trading straddles. Bollinger Bands are drawn by taking a stocks 20-day moving average and calculating two standard deviations above and below the trendline. Very wide Bollinger Bands indicate a period of volatility expansion. Narrow bands indicate a period of volatility contraction. (Volatility traders target stocks whose Bollinger Bands are at their narrowest point during the past year – in other words, where contraction is at an extreme !) Because these contractions often precede a period of sharp volatility expansion where traders see big moves in an equity. The kinds of big moves that lead to straddle gains! Stocks that have moved disproportionately more than their option premiums will have a high score. Stocks that do not move as much as their option premiums indicate will have a low score. (So ... of course stocks that move are the best ones) Sentiment can be revealed by several indicators, including short interest and analyst ratings. When trading straddles, it is better to find a stock with a very high short interest (and trending higher). If a stock starts to rise, the shorts will need to cover their positions, which can spark a swift, furious rally.Stocks with very bullish sentiment (which can also lead to a dramatic move) can make good straddles as well. Best regards ! (Bernard)
Posted on: Sun, 28 Dec 2014 18:27:29 +0000
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