The Commodity Channel Index (CCI) is a versatile momentum oscillator that measures how far price has deviated from its statistical average, appearing as a line oscillating around zero in a lower indicator panel. Despite its name suggesting commodities only, CCI works excellently for stocks and ETFs, identifying when price has moved too far too fast in either direction. For option traders, CCI excels at spotting extreme conditions ripe for reversals – when readings exceed +100 or -100, the rubber band is stretched and ready to snap back. Unlike bounded indicators like RSI, CCI can reach extreme levels during strong trends, helping distinguish between normal overbought/oversold and truly extreme conditions worth trading.
How CCI Works
CCI measures deviation from the mean:
The Calculation
- Typical Price: (High + Low + Close) / 3
- Simple Moving Average: 20-period SMA of Typical Price
- Mean Deviation: Average absolute deviation from SMA
- CCI: (Typical Price – SMA) / (0.015 × Mean Deviation)
The 0.015 constant scales values for readability.
Reading CCI Values
- Above +100: Overbought condition
- +100 to -100: Normal trading range (70-80% of time)
- Below -100: Oversold condition
- Zero: Price at average
Unlike RSI (0-100), CCI has no bounds – can reach ±200, ±300, or more.
CCI Settings and Timeframes
Standard settings work but can be adjusted:
Period Selection
- 20 periods: Standard (Donald Lambert’s original)
- 14 periods: More sensitive, more signals
- 40 periods: Smoother, major moves only
- 5-10 periods: Scalping/day trading
Match period to option timeframe.
Overbought/Oversold Levels
- Conservative: ±100 (original levels)
- Moderate: ±150 (fewer but stronger signals)
- Aggressive: ±200 (extreme conditions only)
- Adaptive: Adjust based on individual stock behavior
Some stocks regularly hit ±150, others rarely exceed ±100.
CCI Signals for Options
Key signals from this lower indicator:
Basic Reversal Trades
Oversold Bounce (Put Selling):
- CCI drops below -100
- Price near support
- CCI hooks up
- Sell puts below support
Overbought Reversal (Call Selling):
- CCI rises above +100
- Price near resistance
- CCI rolls over
- Sell calls above resistance
Zero Line Crosses
Bullish Cross:
- CCI crosses above zero
- Momentum shifting positive
- Trend potentially starting
- Focus on put selling
Bearish Cross:
- CCI crosses below zero
- Momentum shifting negative
- Trend potentially starting
- Focus on call selling
CCI Divergences
Powerful reversal signals:
Bullish Divergence
Price lower low, CCI higher low:
- Downward momentum waning
- Sellers exhausted
- Reversal setup building
- Premium put selling opportunity
Example:
- Stock drops from $50 to $45
- CCI reads -120
- Stock drops to $44
- CCI only reaches -80
- Sell $42 puts
Bearish Divergence
Price higher high, CCI lower high:
- Upward momentum waning
- Buyers exhausted
- Reversal setup building
- Premium call selling opportunity
CCI Trend Trading
This lower indicator also works for trends:
Trend Mode Signals
Strong Uptrend:
- CCI stays above zero
- Dips to zero are buying opportunities
- Readings above +100 are normal
- Only sell puts on pullbacks to zero
Strong Downtrend:
- CCI stays below zero
- Rallies to zero are selling opportunities
- Readings below -100 are normal
- Only sell calls on rallies to zero
CCI Trend Line Breaks
- Draw trend lines on CCI itself
- Breaks often precede price reversals
- Early warning system
- Position before crowd
Advanced CCI Patterns
Beyond basic overbought/oversold:
CCI Rejection Pattern
From Extreme:
- CCI exceeds ±200 (rare extreme)
- Immediately reverses
- Violent snapback likely
- Size up reversal trades
CCI Divergence Failure
When divergence doesn’t work:
- CCI divergence appears
- Price continues anyway
- Very strong trend
- Stay out or trade with trend
Multiple Time Frame CCI
- Daily CCI oversold
- Weekly CCI midrange
- Hourly CCI turning up
- High probability alignment
CCI for Weekly Options
Optimizing for short-term trades:
Weekly Settings
- 10-period CCI on hourly chart
- ±150 extreme levels
- Quick signals for 5-7 DTE
- Combine with support/resistance
Scalping with CCI
For 0-1 DTE:
- 5-period CCI on 5-minute chart
- ±100 levels
- Quick reversals
- Small size, multiple trades
Combining CCI with Price
This lower indicator needs context:
CCI + Price Action
Best Setups:
- CCI extreme + Price at S/R
- CCI divergence + Chart pattern
- CCI zero cross + Trend line break
- Multiple confirmations
CCI + Volume
High Probability:
CCI + Other Oscillators
Confirmation Stack:
- CCI oversold (<-100)
- RSI oversold (<30)
- Stochastic oversold (<20)
- Triple confirmation
Common CCI Mistakes
Fighting Extremes: CCI can stay extreme in trends Ignoring Context: Need price confirmation Wrong Timeframe: Daily CCI for day trades Fixed Levels: Some stocks need adjusted levels
Building a CCI System
Systematic approach:
CCI Extreme Scanner
Daily routine:
- Scan for CCI > +150 or < -150
- Check if at resistance/support
- Verify not in strong trend
- Wait for CCI reversal
- Enter option position
Management Rules
- Exit if CCI divergence fails
- Take profits at zero cross
- Stop if new extreme without reversal
- Size based on extremity
CCI vs Other Oscillators
Comparing to similar indicators:
CCI Advantages
- Unbounded (shows true extremes)
- Leading indicator tendencies
- Works in trends and ranges
- Clear mathematical basis
CCI Disadvantages
- Can whipsaw in choppy markets
- No standard overbought/oversold
- Requires price confirmation
- Less popular than RSI
Many traders use CCI as confirmation for other signals.
Key Takeaways
Commodity Channel Index (CCI):
- Lower indicator measuring price deviation
- Oscillates around zero (unbounded)
- Above +100 = overbought
- Below -100 = oversold
- Excellent for extremes and divergences
- Works for all securities (not just commodities)
- Combines mean reversion with trend
CCI is the option seller’s extreme detector, identifying when price has stretched too far from its average and is primed for a snapback. This lower indicator’s unbounded nature reveals truly extreme conditions that bounded oscillators might miss. Master CCI’s extremes and divergences to time premium sales when the rubber band is stretched tightest. Remember: the further CCI ventures from zero, the more violent the eventual return tends to be.