V.11:9 (376-381): Trading Options With Bollinger Bands And The Dual CCI by D.W. Davies

V.11:9 (376-381): Trading Options With Bollinger Bands And The Dual CCI by D.W. Davies
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Trading Options With Bollinger Bands And The Dual CCI by D.W. Davies

Combining two classic indicators, the commodity channel index (CCI) and Bollinger bands, can be a potent timing tool for options trading. This author was inspired by John Bollinger's article "Bollinger Bands" from the 1993 S&C Bonus Issue to develop a way of using the CCI to confirm Bollinger bands' trading opportunities. His technique uses a new variation of the CCI, the dual CCI. Here's how to put the technique to work.

To trade options successfully, traders need to consistently and correctly predict three elements of the underlying asset: price, price direction and the amount of time it will take for price to arrive at the expected price changes.

Bollinger bands are lines plotted around price to form a trading band or range. The bands are used to identify trading opportunities where market prices are relatively overvalued or undervalued. Rather than providing absolute buy and sell signals, Bollinger bands tell the trader whether prices are high or low on a relative basis. The concept of channels or trading bands is well recognized as an aid in determining the probable range of prices.

The centered channel analysis (CCA) technique tries to define cycles and predict price by drawing price bands around centered moving averages of price and measuring the amplitude of price cycles within the price channel. The disadvantage of centered channel analysis is that it requires the trader to visualize or project the channels into the future, which introduces an element of subjectivity. Because of this subjectivity, the CCA is not ideally suited for technical analysis.

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