MACD and Bollinger Bands: How Indicators Drive Options Signals
MACD and Bollinger Bands are two of the most widely used technical indicators in the world. Used together, they provide a powerful filter for separating genuine momentum from choppy noise — which is exactly how Hood Option uses them.
Part 1 — MACD: Measuring Momentum
MACD stands for Moving Average Convergence Divergence. Despite the complicated name, the concept is straightforward: it measures the relationship between two exponential moving averages (EMAs) of the closing price to detect changes in momentum.
The Three Components
MACD Line
EMA(12) − EMA(26)The difference between the 12-period and 26-period exponential moving averages. When short-term momentum is stronger than long-term momentum, this line is positive. When long-term momentum dominates, it is negative.
Signal Line
EMA(9) of MACD LineA 9-period EMA of the MACD line itself. It smooths the MACD line and acts as a trigger for crossover signals.
Histogram
MACD Line − Signal LineThe bar chart displayed below the MACD line. When positive and growing, momentum is accelerating upward. When negative and shrinking, downward momentum may be exhausting.
How Hood Option Uses MACD
Hood Option checks two MACD conditions on the daily chart (12/26/9 standard settings):
Bullish MACD: CALL direction
- • MACD Line is above the Signal Line (bullish crossover)
- • The spread between them is at least 0.1% of the stock price (filters out weak, insignificant crossovers)
- • The histogram is expanding — momentum is accelerating, not decelerating
Bearish MACD: PUT direction
- • MACD Line is below the Signal Line (bearish crossover)
- • The spread is at least 0.1% of price (same filter)
- • The histogram is expanding negatively — downward momentum is increasing
The 0.1% minimum spread filter is crucial. Without it, MACD generates constant false signals when the two lines are almost on top of each other. Hood Option only acts when the crossover has real conviction behind it.
Part 2 — Bollinger Bands: Measuring Volatility
Bollinger Bands were developed by John Bollinger in the 1980s. They consist of three lines plotted around price:
Middle Band = 20-period Simple Moving Average (SMA)
The baseline — the average closing price over the last 20 periods.
Upper Band = SMA + (2 × Standard Deviation)
Two standard deviations above the mean. Price touching here is statistically "high."
Lower Band = SMA − (2 × Standard Deviation)
Two standard deviations below the mean. Price touching here is statistically "low."
Statistically, approximately 95% of price action falls within the two standard deviation bands. When price is near the upper band, it is extended relative to recent history. When near the lower band, it is compressed.
The %B Indicator
Hood Option uses a derived metric called %B, which tells you exactly where price sits within the Bollinger Bands on a 0–100 scale:
%B = (Price − Lower Band) ÷ (Upper Band − Lower Band) × 100
The Squeeze — When Bands Compress
One of the most powerful Bollinger Band signals is the "squeeze" — when the upper and lower bands move very close together. A squeeze indicates that volatility has compressed and a large move is coming. The direction of the breakout from a squeeze is the trade.
Hood Option uses a bandwidth ≥ 4% filter to avoid acting on signals during a squeeze. Bandwidth is calculated as:
Bandwidth = (Upper Band − Lower Band) ÷ Middle Band × 100
When bandwidth is below 4%, the bands are too tight to provide reliable directional information. The signal engine skips the Bollinger Band check in this scenario.
MACD + Bollinger Bands Together: The Combined Signal
Neither MACD nor Bollinger Bands alone is sufficient for a high-quality signal. Together, they form a much stronger confirmation:
Strong CALL confirmation
- ✓ MACD Line above Signal Line with expanding histogram
- ✓ %B between 50 and 80 (bullish but not extended)
- ✓ Bandwidth above 4% (no squeeze — volatility is normal)
This means: daily momentum is bullish AND price is positioned in the upper half of its recent range without being dangerously extended. A strong setup for CALLs.
Strong PUT confirmation
- ✓ MACD Line below Signal Line with expanding negative histogram
- ✓ %B between 20 and 50 (bearish but not oversold)
- ✓ Bandwidth above 4% (no squeeze)
This means: daily momentum is bearish AND price is in the lower half of its recent range. A strong setup for PUTs.
This combined daily technical check contributes 25% to the overall Hood Option confidence score, sitting alongside 50% intraday conditions and 25% chart pattern detection. A ticker that scores well on all three tiers is a genuinely high-conviction setup.
Key Takeaways
MACD measures momentum shifts between short-term and long-term moving averages.
The 0.1% minimum MACD spread filter eliminates weak, noise-driven crossovers.
Bollinger Bands measure where price sits within its recent volatility range.
The %B indicator gives a precise 0–100 reading of where price sits in the bands.
The 4% bandwidth filter prevents acting on squeeze conditions.
Together, these two indicators add a significant daily technical confirmation layer on top of intraday VWAP analysis.
See these indicators in action
The Trade Search panel shows MACD and Bollinger Band readings for any ticker you analyze.
Open Trade Search →This article is for educational purposes only and does not constitute financial advice. Options trading involves substantial risk of loss. Always consult a licensed financial professional before trading.