Basically the opposite of "Playing the Bands" and betting on reversion to the mean is playing Bollinger Band breakouts. Breakouts occur after a period of consolidation, when price closes outside of the Bollinger Bands. Other indicators such as support and resistance lines (see: Support & Resistance) can prove beneficial when deciding whether or not to buy or sell in the direction of the breakout.
The chart of Wal-Mart (WMT) below shows two such Bollinger Band breakouts:
Option Volatility Strategies
There are two basic ways to trade volatility:
- Buy options with low volatility in hopes that volatility will increase and then sell back those options at a higher price.
- Sell options with high volatility in hopes that volatility will decrease and then buy back those same options at a cheaper price.
Since Bollinger Bands adapt to volatility, Bollinger Bands give options traders a good idea of when options are relatively expensive (high volatility) or when options are relatively cheap (low volatility). The chart below of Wal-Mart stock illustrates how Bollinger Bands can be used to trade volatility:
