Trading School: Keep the Use of Bollinger Bands Simple

Posted by jbrumley on January 10, 2019 9:08 PM

Sometimes, traders – and option traders in particular – make things more difficult than they need to be. That’s not to suggest this game is easy, or that people playing it shouldn't take it seriously. But, there’s something of a tendency to conflate ‘complicated’ with ‘effective.’

If that’s you, it’s not entirely your fault. This industry has gotten pretty good at selling bells and whistles that may or may not be worth it. In the end though, those bells and whistles don’t necessarily pay off. Often times it’s the obvious, simple things that yield the best rewards.

It’s an idea members of our After Hours Advisory service experienced, and benefited from, not too long ago, locking in a 40% gain on Weight Watchers (WTW) puts in just a couple of days’ time.

The After Hours newsletter is simplicity in and of itself. The trade suggestions are sent after the market closes on Monday’s, so you don’t need to be sitting in front of your computer in real-time to take advantage of the ideas. It’s balanced too, with each Monday evening alert including a put and a call trade.

More than that, however, the trading ideas are rooted in simple-but-reliable trading strategies.

Bollinger Bands

Ever heard of Bollinger bands? They’re essentially a way to wrap an envelope around a chart. Most of the time a stock or index travels inside that envelope, but on the rare occasions when a strong move pushes an index or stock outside of those band lines, it’s significant. While 95% of a chart’s action happens within those bands, it’s the other 5% that makes for the most trade-worthy moves.

That’s what happened back on December 17th. Shares of Weight Watchers (WTW) fell below their lower 20-day Bollinger band for the first time in a long time, and they stayed there. That sell/bear signal is marked with a pink arrow on the chart below.

With a full-blown bearish signal on the table, we issued an alert to buy the Weight Watchers (WTW) January Week 2 (01/11) 52.5 puts (WTW 190111P52.5) at a price of $8.30 (or less), or $830 per contract. We ended up only paying $7.60, or $760 per contract. Of course, we didn’t get into that position until the next day – the 18th – because this is the After Hours Trader advisory.

More important though, it worked. Despite an open slightly above the 17th’s close on the 18th, the close on the 18th was even lower, and once again below the falling Bollinger band. Same deal on the 19th… an “up” open, and then an even lower close that day. We ended up locking in a 40% gain that day, marked with a light blue arrow, by selling the WTW puts at $10.70.

We’ve seen bigger moves from Weight Watchers before, but they weren't reliable moves. This move outside the Bollinger bands, as short-lived as it was, was a reliable one.

Trading Tips

Don’t build a complete trading strategy around Bollinger bands just yet. Though it was the crux of the trigger for this trade, it wasn't the only thing going on to lead us to a bearish conclusion. For WTW, we had just seen a cross below the semi-pivotal 20-day moving average line (blue), and the low near $46.00 made earlier in the month (red dashed) had failed to hold the stock up with this test. All three are reasonably bearish clues. What made them even more telling was the combination of all three, along with %R signals and the sell signal from the Commodity Channel Index indicator (neither is shown), both of which are also part of the After Hours Trading newsletter’s strategy set. The application of both of those tools are just as simple and straightforward as our use of Bollinger bands was.

And that’s the key to remember here. This wasn't a complicated strategy. In fact, it was by most standards an oddly obvious tactic. Yet, it still worked.

It should be an encouraging reality for many investors that want to get a little more active, especially with options, but don’t know where or how to start due to limited time. While we’ve certainly banked bigger winners than that, for two days, 40% isn’t bad at all. It only takes a couple of those per month to give a portfolio a serious boost. Perhaps best of all, it doesn't really take an expensive, specialized trading platform to find stocks in specific technical situations like the one Weight Watchers was just in. It’s possible to even find those trade setups for free.

Or, if you’d still rather let an expert not only find the trade setups but also select the specific options to trade – complete with targets and stops – the BigTrends After Hours Trader newsletter makes it quite easy to get started. You can even use one of our auto-trading partner brokers to handle all the trading activity for you. To learn more, visit the After Hours Trader information page.