Bollinger Band Snaps (BBS)Bollinger Band Snaps (BBS)
Timing of options trades are elusive, especially during dynamic price trends. There is one technique, however, that reliably and consistently allows you to time trades. The Bollinger Band Snap (BBS) signal occurs at very precise moments during a bullish or bearish trend, and vastly improves timing of both entry and exit.
The chart of Chipotle (CMG ) is highlighted with three examples. The first occurred in late February, when price moved below the lower Bollinger band for two sessions. The move then “snapped” back into range, which is predictable. Price rarely remains outside of the Bollinger Band range for long.
The second event occurred in mid-March, when price moved below the lower Bollinger band. In this case, the expected retracement (snap) happened the next market day.
The final incident was the longest of the three, from mid-May into end May. Price traded above the upper band for six consecutive sessions before snapping back into range.
The signal is reliable because a retracement back into the Bollinger Band’s two-standard deviation range is inevitable. It can take a longer or shorter period, but it eventually occurs. The signal provides both an entry flag (when price moves outside of the band) and an exit flag (when it moves back into range).
Trading this signal is also apparent at the time it begins to develop. A move outside of the Bollinger trading range generally is going to snap back within a few sessions in each instance. In the February case, price was approximately $755 per share. With the expectation of a snap back into range, a bull credit spread could be opened with puts. Buying one 735 put and selling a 740 put would have set up a small credit. Using the weekly expirations ensures rapid time value decay.
In the second example, price was approximately $465 per share. A call could be opened using 4 – 6 weeks to expiration and opening an at-the-money strike.
The credit spread strategy could also be applied in mid-May when price began advancing above Bollinger’s upper band at $998 per share. Buying one 1030 call and selling a 1025 call for a credit.
In all of these instances, the entry point is easy to identify. It is seen where price moves outside of the two standard deviation range marked by the upper and lower bands. The exit point then occurs when price snaps back into range.
