Bollinger Bands         

Bollinger Bands

Bollinger Bands, created by John Bollinger, are line plots above and below a moving average, with the spacing between the lines dependent on price volatility. The upper line is two standard deviations above, and the lower line is two standard deviations below, the moving average. Thus, the bands are wider when volatility is high and they get narrower when volatility is low. When price goes up to the higher band, it indicates an overbought condition, but this does not necessarily indicate a reversal because the overbought condition can last for quite a while. When price falls to the lower band, it indicates an oversold condition, but this does not necessarily indicate a reversal because the oversold condition can last for quite a while. Prices tend to stay within the bounds of the upper and lower band, but when prices move outside the bands in the direction of the current trend, it indicates continuation of the trend. When the bands narrow, it increases the probability of a breakout.

When you are analyzing potential option positions, it helps to have a computer program like Option-Aid that swiftly calculates volatility impacts, probabilities, statistics, and other parameters of interest. These programs can pay for themselves with the first trade that they help you with.

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