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\tMost of the time, technical analysts use Bollinger Bands (the blue lines on the chart) to show the most probable trading range for a stock or an index. But, on the VIX, we can use the Bollinger Bands to determine how much energy is built up or spent. That allows us to prepare for the next move.<\/p>\n
\tYou see, volatility contracts and expands. Periods of low volatility are always followed by periods of high volatility, and vice versa. By looking at the Bollinger Band width – the distance between the lower and upper bands – we can determine where we are in the volatility cycle and prepare for the next move.<\/p>\n
\tLook at the lower graph on the chart, which displays the Bollinger Band width. On Friday, the Bollinger Bands closed with only a 12.3% difference between the upper and lower bands. That is the smallest distance we’ve seen all year.<\/p>\n
\tThe Bollinger Bands are contracting. They’re coming together and building energy for the next big move in the VIX.<\/p>\n
\tWe had a similar situation in mid-June just before the VIX spiked 20% higher. And, in early August, contracting Bollinger Bands preceded at 60% surge in the VIX.<\/p>\n
\tOf course, we can’t say for sure that volatility will spike this week just because the Bollinger Bands are contracting. They contracted for two full months before the VIX spiked higher in April.<\/p>\n
\tBut, like I said earlier… it is October, and it’s option expiration week. So, it seems to me that it’s probably better to be prepared for more volatility this week and not get it… than to be unprepared for a spike in volatility and then get it.<\/p>\n
\tBest regards and good trading,<\/p>\n
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<\/div>\n\tJeff Clark<\/p>\n
\tP.S. <\/strong>How are you preparing for a potential surge in volatility? Send me your thoughts, questions, or suggestions right here<\/a>.<\/p>\n \t\tYour Option Glossary<\/a> is excellent. Thanks for making it available to the public!<\/p>\n \tReader Mailbag<\/h2>\n
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