The TTM Squeeze indicator can help forecast market trends with signals. Learn how to recognize when a consolidating market is ready to shift into a new trend.
It’s the eternal question. A trader has a setup that they like on an index they follow. Now...does the trader go directional, or does the trader sell some options premium?
To answer that question, the trader may need to know if the market is consolidating or trending. If it’s consolidating, the trader could consider selling some premium. If it’s trending, and the market has just pulled back to support, the trader could go either way. For example, the trader could buy a 0.70 delta call for an in-the-money (ITM) directional trade or sell an at-the-money (ATM) put vertical spread. Both trades make sense.
But what if a market is about to switch from a consolidation to a full-on trend? This may be obvious in hindsight, but it could be too late. Luckily, there are tools on the thinkorswim® platform that can help detect when such a switch might be near.
Figure 1 shows a stock price chart with the TTM Squeeze indicator displayed on the bottom pane. The TTM Squeeze indicator looks at the relationship between Bollinger Bands® and Keltner Channels to help identify consolidations and signal when prices may be likely to break out (whether up or down). This colorful indicator is displayed as histogram bars above and below a horizontal axis. The red dots along the horizontal axis indicate that the stock is “squeezing” out the last bit of consolidation from a period of sideways price action. It then starts to build up energy to shift to a trending market. The market trends until the momentum starts slowing down—a sign the trending action may be coming to an end.
The first green dot after the series of red dots suggests the squeeze is on, and this market is ready to move.
In this case, with the histogram above zero, a bullish options strategy might make sense. Decision time: Does the trader go directional or sell some premium?
For example, the trader could consider legging in to a bullish call vertical spread. Initially, they could buy ITM calls. If they want to get price movement that closely mimics the underlying, the trader could look at options with a delta of at least 0.70.
Then they wait...and wait...for the momentum on this trade to end. That happens when the momentum on the histogram changes color (in this case, from light blue to dark blue), indicating that the trending price action is reaching a conclusion.
This is when a trader might sell some ATM calls close to expiration to complete the vertical spread.
Log in to the thinkorswim platform and select the Charts tab. At the upper right of any chart, follow the path: Studies > Quick Study > John Carter’s Studies > TTM_Squeeze.
A best-case scenario at this point is a market that goes back into a choppy consolidating phase. Under these circumstances, the trader’s long ITM calls hold mostly intrinsic value and suffer minimal premium decay. The short call, on the other hand, starts losing premium at a quick clip.
The TTM Squeeze indicator represents a unique moment in the life of the underlying asset—right before it moves out of a consolidation range. The key is to identify that critical moment and use options delta to maximize the potential opportunity.
The TTM Squeeze indicator was developed by John Carter, who is a recognized authority on technical analysis but is not a representative of TD Ameritrade.
Do Not Sell or Share My Personal Information
Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type.
Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
The information, opinions, and analysis contained in this article are the author’s alone. TD Ameritrade does not endorse the material, and did not participate in the development of the material. Technical analysis cannot predict performance, and past performance is no guarantee of future results.
Creating spreads or legging into spreads options positions can entail substantial transaction costs, including multiple commissions, which may impact any potential return. These are advanced options strategies and can involve greater risk, and more complex risk, than basic options trades.
Market volatility, volume, and system availability may delay account access and trade executions.
Past performance of a security or strategy does not guarantee future results or success.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.
TD Ameritrade, Inc., member FINRA/SIPC, a subsidiary of The Charles Schwab Corporation. © 2024 Charles Schwab & Co. Inc. All rights reserved.