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Hey everyone, Kirk here again at Option Alpha and welcome back to the daily call. Today, we’re going to be talking about how to trade options with the Bollinger Bands indicator. If you get started trading options or if you get started trading stocks, even Bollinger Bands is going to be one of those key technical indicators or technical analysis studies that you might run across early on. And so, I want to describe not only what Bollinger Bands are and what happens, I guess and what they are and how they work, but also how we might use them in options trading. First thing, Bollinger Bands were obviously developed by a famous technical trader. His name was John Bollinger and basically, what he did is he plotted a simple moving average alongside of a stock which is nothing new, but then he used standard deviation levels, so sometimes two or three standard deviation levels above and beyond that simple moving average using volatility. It was a very simple concept and that’s why I think it’s actually relevant to options traders because you can get a good idea of how far or what the expected move might be for a stock going forward in the future using implied volatility. But what he basically did is he created three bands or three lines on the chart. If you pull up a Bollinger Bands chart with a stock, you’ll see three lines. You’ll see a line in the middle which is the moving average and then from that, you’ll see these two lines on the outsides which are the standard deviation lines. Again, you can move and adjust these and make these wider or more constricted based on whatever settings you like. A common one is just to use two standard deviations as a benchmark. Really, use three standard deviations, but it might be a little bit too far out. What happens is that there’s a couple of different ways that you can use Bollinger Bands of I guess how it’s classically used. The first one is just to look at how far the Bollinger Bands, so the expected moves are from the central moving average. When those Bollinger Bands start to come in and start to become constricted, it’s commonly referred to as a squeeze. And so, when a squeeze happens, it just means that there’s low volatility, nobody’s really expecting anything and that's when you might actually be in the opposite opinion, meaning that if nobody's expecting anything and volatility is pretty low, it could be just the time that volatility starts picking up. We do commonly see that. When volatility becomes low, we know that some sort of breakout might happen, a breakout higher or a breakout lower. We also see when the bands get extended or really, really wide, so they start flaring out. I think of it like two hands starting to really move apart. We start to see the Bollinger Bands start pointing in the opposite direction. This usually comes after a huge volatility move, meaning a huge move in the underlying stock. And so, when this happens, also, that does mean that sometimes, that volatility move that just happened is maybe too much for the market to handle and it’s already gone too far and might start to calm down, so volatility might start to contract. Again, when you start to see these Bollinger Bands start to fan out basically, that means that it might start to revert back to the mean and volatility might start to decrease. The way that we use Bollinger Bands at Option Alpha is a little bit different because we’ve done a lot of back-testing on Bollinger Bands and we only used it for one direction trade types. Inside of our research which you can find at optionalpha.com/signals where we back-tested a bunch of different technical analysis indicators, we found that Bollinger Bands actually works okay for basically about like one type of environment. When we tested if the stock moves outside of these expected ranges or it hits these bands or goes beyond these bands, does that create a trading signal and is that trading signal relevant? Is it reliable? Does it accurately predict reversal or continuation of the stock? And so, we only found probably like one environment where it actually works pretty well. Again, you can check that out at optionalpha.com/signals. When we find that we get this signal using Bollinger Bands and a combination of some other technicals, we do end up trading based on credit spreads. We will use credit spreads to make directional trades and the beautiful thing about using credit spreads with technical analysis is that you don't have to be exactly right in your stock prediction. It still gives you a margin of error if you use a credit spread versus just using say a simple long option strategy or long puts, long calls or even trading the stock individually. That's how we use options with Bollinger Bands and some of these other technicals, is just to recognize that the technicals may not be 100% accurate obviously. I guess we should always recognize that technicals are never 100% accurate. And to use credit spreads and far out of the money option selling strategies as a means to then increase our probability of success and give ourselves a margin for error. Hopefully that helps out. As always, if you have any questions or comments, let me know in the comment section. Until next time, happy trading!