The TTM Squeeze indicator can help identify when prices are likely to break out of a consolidation range
Technical traders examine when to apply directional options strategies and when to sell premium
Technical traders decide when to use delta when trading options
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.
How to read the TTM Squeeze
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.
FIGURE 1: SQUEEZING OUT. The TTM Squeeze indicator alerts a trader when markets may break out of a consolidation range. Source: thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.
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.
How to plot the TTM Squeeze indicator
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.