Trade Options With Bollinger Bands

with Steve Lentz

October 16, 2013

Sponsored By:
 Disclaimer
Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a
person must receive a copy of Characteristics and Risks of Standardized Options. Copies are
available from your broker, by calling 1-888-OPTIONS, or at www.theocc.com. The information in
this presentation is provided solely for general education and information purposes. No statement
within this presentation should be construed as a recommendation to buy or sell a security or to
provide investment advice. Any strategies discussed, including examples using actual securities and
price data, are strictly for illustrative and educational purposes only. In order to simplify the
computations, commissions, fees, margin interest and taxes have not been included in the examples
used in this presentation. Such costs will impact the outcome of the stock and options transactions
and should be considered. Investors should consult their tax advisor as to how taxes may affect the
outcome of contemplated options transactions. Past performance does not guarantee future
results. Supporting documentation for any claims, comparisons, statistics or other technical data in
this presentation is available by contacting DiscoverOptions. The views of third party speakers and
their materials are their own and do not necessarily represent the views of Chicago Board Options
Exchange, Incorporated (CBOE). CBOE is not affiliated with OptionVue or DiscoverOptions. This
presentation should not be construed as an endorsement or an indication by CBOE of the value of
any non-CBOE product or service described in this presentation.
What is a standard deviation?

What are Bollinger Bands and

what trading signals can they
generate?

What is a good options trading

system based on Bollinger
Bands?
Standard Deviation

The Standard Deviation is a measure of how spread out numbers are.

“Average distance to the mean”……with a twist

Its symbol is σ (the greek letter sigma)

The formula is: the square root of the Variance. Variance

Variance = average of the squared differences from the Mean.

 Why square the differences?
Standard Deviation measures how spread out the numbers are.

an average of the absolute values

Oh No! It also gives a value of 4, Even though the differences are more spread out!
The heights (at the shoulders) are: 600mm, 470mm, 170mm, 430mm and 300mm.
Find out the Mean, the Variance, and the Standard Deviation.
Your first step is to find the Mean:
Answer: 600 + 470 + 170 + 430 + 300 = 1970
1970 / 5 = 394 mm

Now, we calculate each dogs difference from the Mean:

 Variance = average of the squared differences from the Mean.

So, the Variance is 21,704.

And the Standard Deviation is just the square root of Variance, so:
Standard Deviation: σ = √21,704 = 147.32... = 147 (to the nearest mm)
How is this useful?
 39.02

19.40
27.28

24.39
-5.20 -2.29
1.60 -5.93
17.88 13.52
-31.27 -7.50
-33.02 -4.11

-0.55
-4.48
-8.51
-6.73

-18.30
-18.55
 19.4

13.6
10.2

6.2

10.8
11.6
6.5 1.80
-6.2
10.8 -2.4

--6.2 -4.8
-5.0 -0.7
-6.9
-7.9
-11.4

-17.4
-18.60
DATE CLOSE 20-day
Avg
Difference from
the Mean Square of deviation
on 10/10

Avg of the squared

deviations

Sqrt, i.e.
Sum of Standard
squared Deviation
deviations
10.33
Bollinger Bands®
• Developed by John Bollinger
• Volatility bands placed above and below a moving
average.
• Volatility is based on the standard deviation which
changes as volatility increases and decreases.
• Automatically widen when volatility increases and
narrow when volatility decreases.
•Middle Band = 20-day simple moving average (SMA)

• Upper Band = 20-day SMA + (20-day standard deviation of price x 2)

• Lower Band = 20-day SMA - (20-day standard deviation of price x 2)

2SD Lines 2

Bollinger Bounce:
Price touches (or closes beyond) upper
or lower 2 SD line and then closes
inside…. 2nd time is a charm

M&W Patterns by Arthur Merrill

 1 SD
2 SD

Bollinger Breakout (with 1-SD setting)

Price touches (or closes beyond) upper line or
lower line and signals a trend.
 1 SD
2 SD

Credit Spread System Premise:

When price closes outside a 1SD Band for the first time, it
signals an actionable trend. A credit spread positioned with
the short strike just outside the opposite 1SD Band is likely
to make money by the time an opposite trend is established.
Bollinger Band Rolling Credit Spread System

Bullish Credit Spreads

Setup/Trigger
Since it closed below the lower 1SD Band, price now closes for the first
time above an upper 1 SD Band (20-1).

Entry:
On the close, enter an out-of-the-money put credit spread position with
the short strike positioned just outside the opposite 1 SD Band.
• 1st month with over 21 days remaining
• Obtain at least 5% yield on amount required

Exit:
• Exit the position, on the close, when price closes below the lower 1SD
Band or
• Exit when you can buy back the spread for 1/3 of the credit or better.

Bearish Credit Spreads – Invert the instructions

3/13
4/5

804.29
$0.20 $2.10 $3.10
Credit spreads can benefit from both time trend.

$2.10

$1.50
3/13/2012
4/5/2012
Take the Loss
837.90

4/5
 OPEN

CLOSE
4/5/2012
4/23/2012 Take the Yield Grab
Hypothetical Returns
Hypothetical Returns
Using 1-SD Lines and taking 2/3 yield grab
200-SMA Filter
Hypothetical Returns
Hypothetical Returns
 vs $6,160

Hypothetical Returns
 Thank You

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