Options Made Easy: Your Guide to Profitable Trading, Second Edition

Consolidations—Pennants, Triangles, and Wedges

Consolidations occur where the individual price spreads are tight on each bar or candlestick, indicating that buyers and sellers are matching each other closely. This in itself is a sign of lower volatility. It’s important for you as a trader to recognize these chart patterns because volatility has a direct impact on options prices. This in turn can lead us to uncover useful options strategies that can take advantage of low or high volatility and distorted options prices. More on strategies later. For now, let’s take a look at these price patterns.

Pennants and Triangles

You can recognize a Pennant by the fact that it has lower highs and higher lows. These converge and are a sure sign of decreasing ...