How Bollinger Bands Can Help You Win with Straddles

How you can use Bollinger Bands to help you find profitable options trading opportunities

by Mark Fightmaster

    Published on Sep 4, 2015 at 9:50 AM
    Updated on Jun 24, 2020 at 10:16 AM

    The key to a successful straddle is to locate a stock that's on the verge of making a drastic price swing either higher or lower. Since a straddle is composed of a long put and a long call at the same strike price, the direction of the move doesn't matter -- only its magnitude. Specifically, you need the shares to make a big enough move to offset the increased cost of buying double premium.

    Bollinger Bands are a technical indicator that can be crucial to your success in trading straddles. To create Bollinger Bands, you draw a line two standard deviations above and two standard deviations below a central moving average (typically, the 20-day).

    When these bands are spread wide apart, it indicates a period of rising volatility. On the other hand, when the bands are pinched close together, the stock is going through a period of contracting volatility. This latter scenario is where you need to start watching the shares carefully for a potential breakout. Once the contraction reaches an extreme level, oftentimes a phase of rapidly expanding volatility will follow.

    Most online investing and trading platforms allow you to plot Bollinger Bands on a stock's chart. When you're researching potential candidates for straddle plays, be sure you check out this indicator to find out where the stock has been and where it might be headed, from a volatility perspective.

    In the best-case scenario, you might find a situation where a stock's Bollinger Bands are at their narrowest status of the past year. This could be a big red flag that a major move is around the corner.

    As a final caveat, always be sure that you're keeping up with the latest company headlines. If there's a buyout offer on the table, the stock will generally remain in a low-volatility trading range very near the offer price. So, before you bet on a volatility explosion, be sure there's no other reason why the shares are range-bound.


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