Stocks worst decline since Brexit vote.

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In Part 1, we will cover the Option Contract, Assignment and Exercise, and American and European style options.

In Part 2 we will discuss the components that comprise an option's price and the Greeks.

In Part 3 we will be discussing Intrinsic and Extrinsic value: two components that comprise and option's overall value.

In Part 4 we will be discussing the important topic of Volatility; specifically the differences between Historical and Implied

volatilities.

I had a recent discussion with another trader who expressed his surprise over the market reaction (the S&P500) to the

announcement of tapering on December 18th. We both expected the market would react negatively; instead it reacted

with a strong positive move.

In this article, we will be looking at how you can trade the volatility expansion prior to the announcement and the expected

collapse of volatility after the announcement; typically described as a binary event.

Debit and Credit spreads are called Vertical Spreads. It's a common strategy and the building block for other more

complex strategies when trading options.

Often when discussing the markets with other traders and investors, it comes as a surprise to them to hear that the

percent price movement of an asset (stock, future, ETF, etc.) on a daily basis is random (it follows a geometric Brownian

motion, an assumption incorporated in the Black-Scholes option pricing model).

As traders, we often focus on winning trades; not the losers. However, there is more to be gained by reviewing losing

trades to understand what can be done better (or should be avoided) in the future.

At OptionsAnnex.com we always consider the risk associated with each trade using the Probability Model. As such, we

determine our risk levels using several standard deviation (SD) levels (i.e., 1 SD, 1.5 SD, and 2 SD).

At OptionsAnnex.com we always consider the probability of profit (POP) of a trade, and prefer strategies that offer a POP

in excess of 90%. Given this criteria, we find selling options (strategies like credit spreads and iron condors) are far

better than buying options (strategies like debit spreads and long positions).

While many traders consider trade management after a position is placed (especially for losing positions), considering

the risks before a position is placed (before initiating a trade) is far more important.

As sellers of options that are far OTM (out of the money), we favor high probability of profit (POP) strategies with low

failure rates or PITM (probability of expiring in the money). However, few option traders ever think about the possibility

that the short strike of a high POP position (or trade) is breached or touched at any time prior to expiration; a statistic

called POT (probability of touch).

With options we have a lot of strategies to fit the market or underlying asset. A very common strategy is the Strangle (or

the Iron Condor if you prefer defined risk). With this strategy, we are sellers of premium, which simply means the trade

brings in immediate premium. It also means we can place positions that have high POP (probability of profit).

The reason most traders wipe out their accounts, whether trading options or other assets, is largely due to trading too

large (or too high a percentage of their account).

In this article, we will discuss how to protect an asset in your portfolio.

In this segment, we will discuss how to properly protect a large portfolio of assets.

The Iron Condor is a *defined risk non-directional* strategy that is often employed for underlyings that have high IV (implied

volatility) or high IV rank (greater than 50%). This typically occurs just before an earnings announcement in which a large

move is possible, but the direction is unknown.

Often when selling options *naked*, as occurs with the short Strangle, you may face *assignment*. Assignment occurs when

your position is ITM (in the money) and the other party to your option (the buyer) decides to *exercise* his right to the

underlying asset.

If option spreads (vertical or horizontal) offer significant advantages, then why aren't there more spread trades?

In the first article on Options Spreads, we discussed the Advantages of Debit and Credit Spreads. In this article we'll

discuss the Call Vertical Spreads; both Debit and Credit.

In the first article on Options Spreads, we discussed the Advantages of Debit and Credit Spreads; the second discussed

Call Vertical Spreads; both Debit and Credit. In this article we'll discuss the Put Vertical Spreads; both Debit and Credit.

In the first article on Options Spreads, we discussed the Advantages of Debit and Credit Spreads; the second discussed

Call Vertical Spreads; both Debit and Credit; and in the third we discussed Put Vertical Spreads; both Debit and Credit.

In this article we'll discuss Calendar Spreads; both Call and Put.

In our quest to understand trading options for income, the topic of this article covers the importance of probability when

making trade decisions and the role implied volatility plays.

In our quest to understand trading options for income, the topic of this article covers two important metrics: the Probability

of Touch, and the Probability of Loss.

In our quest to understand trading options for income, the topic of this article covers the difference in outcomes for the

same equivalent risk: same standard deviation level and the same capital at risk.

In our quest to understand trading options for income, the topic of this article covers Theta and the difference in Monthly

theta vs. Weekly theta.

For those who are just learning about options, or want to learn, let's quickly define what is meant by a 'naked short' and a

'credit spread'.

This article is not about the best study or combination of indicators that will lead to consistent profits; it is about taking the

next step in understanding how to trade the markets that offer the ability to make consistent income for a large majority of

traders; not just a small number. This article is the first in a series that will explore that next step.

In this article we will discuss why trading the SPX, as Karen does, is the optimum approach when trading high probability

strategies.

In this article we will discuss the Probability Model, and how it is used to locate your short strikes.

In our quest to understand trading options for income, the topic of this article is comparing IV (implied volatility) and EM

(expected move) of the option chain.

In this article in this series, we will discuss IV (Implied Volatility) Ranking.

In our quest to understand trading options for income, the topic of this article is to determine the impact of IV (implied

volatility) on the price (Mark, or midpoint between bid and ask) on the Weekly SPX with just 7 DTE (days till expiration).

In our quest to understand *trading options for income*, the topic of this article is to explore the ATM (at the money)

Calendar spread (or horizontal spread) and what happens when it goes bad.

In our quest to understand *trading options for income*, the topic of this article is to compare Weekly vs. Monthly income

from short Strangles.

In our quest to understand *trading options for income*, the topic of this article is the distinction and importance between

In our quest to understand *trading options for income*, the topic of this article is the Long Straddle, a strategy that is often

employed to take advantage of expanding IV (implied volatility) prior to earnings.

In our quest to understand *trading options for income*, the topic of this article is that conclusions based on inadequately

designed research, presented by third parties, can often be more harmful then helpful. Recognizing some of the pitfalls

can help you avoid costly assumptions based on faulty or inadequate research.

In our quest to understand *trading options for income*, we often have a short-term bullish assumption after IV (implied

volatility) exceeds 50%. The typical approach is to sell a Put (or Put credit spread) in anticipation of the market moving

up (and IV dropping). But does it also make sense to include selling a Call (or Call credit spread) further OTM?

In our quest to understand *trading options for income*, we often rely on technical and fundamental information for a basket

of stocks. What we fail to do is to keep it simple by focusing primarily on the basic guidelines.

In our quest to understand *trading options for income*, we need to be aware of events, whether scheduled or not, that

affect the markets in terms of magnitude and duration. An excellent example occurred recently with the situation in the

Ukraine.

In our quest to understand *trading options for income*, we take a look at an option strategy called the Backspread.

In our quest to understand *trading options for income*, we often consider improving the efficient use of capital. While

ROC (return on capital) is a common metric, another metric being discussed is Theta Efficiency.

In our quest to understand *trading options for income*, we often consider using strangles when the underlying has low IV

(implied volatility). From prior articles, we understand that the higher the IV Rank (over 50 percent), the greater the

probability of success; this simply reflects that IV tends to be *mean reverting* (i.e., it tends to quickly return to its average

when overextended).

In our quest to understand *trading options for income*, we often consider strategies for playing post-earnings when we

feel the underlying equity will likely consolidate (or unlikely to move much). There are two strategies often considered for

post-earnings: the ATM Butterfly, and the ATM Calendar.

In our quest to understand *trading options for income*, we often consider strategies for low IV (implied volatility)

environments that occur during bull markets. One strategy for consideration is the long Strangle, a *debit* strategy in which

we pay for the position.

In our quest to understand *trading options for income*, we often consider adjusting the POP (probability of profit) based

on the IV Rank of the underlying. That is, during high IV Rank we should get more aggressive with a POP of 68 percent,

which is 1 SD (standard deviation) for a short Strangle; and with low IV Rank we should become more cautious with a

POP of 95 percent, which is 2 SD.

In our quest to understand *trading options for income*, we often wonder which strategy works best in a low IV (implied

volatility) environment: selling a strangle (short strangle) vs. buying a straddle (long straddle).

In our quest to understand *trading options for income*, we consider adjusting the number of options based on IV Rank.

For example, as IV Rank of the underlying increases, will the P&L improve if we increase the number of options traded?

In our quest to understand *trading options for consistent income*, we often consider the impact on P&L of entering new

trades as soon as we close the last. This method increases the use of risk capital without adding to capital at risk,

effectively improving capital efficiency. A recent article on HYPERLINK "http://www.examiner.com/article/trading-options-for-income-capital-redeployment" Capital Redeployment tested the effects on five ETFs; this

article will focus on just the SPX using short Strangles and exiting at 25 percent of premium received.

In our quest to understand *trading options for consistent income*, we often look for good strategies in a low IV (implied

volatility) environment. One strategy often considered is to trade volatility products, such as options in the VXX and

UVXY.

In our quest to understand *trading options for income*, we often consider buying Calls when a rally occurs and there is low

IV (implied volatility). Does this strategy of buying a Call option actually work when we are in the midst of a rally?

In our quest to understand *trading options for income*, we often consider buying debit spreads or strangles (long

positions) in low IV (implied volatility) environments. When IV is low, we expect IV to increase which benefits long

positions. Given that, can an increase in IV overcome the *theta decay* that long positions face?

In our quest to understand *trading options for income*, we often consider further OTM (out of the money) ICs (iron

condors) in the SPX. Would moving the short strikes further OTM to improve POP (probability of profit), while increasing

the width of the spreads, improve our P&L? This article attempts to answer that question.

In our quest to understand *trading options for income*, we often question how accurate is IV (implied volatility) for the S&P

500, which is provided by the VIX. This article attempts to answer that question by comparing the 1 SD (standard

deviation) *expected move* with the *realized move* (or actual move) of the SPX (the index for the S&P 500).

In our quest to understand *trading options for income*, we often consider using the option chain deltas or probability of

expiring OTM (out of the money) when selecting the short strikes for our credit spreads. When we do this, we are

impacted by *skew*.

In our effort to learn to trade options successfully, we must consider the probability of being correct. Options make this an

easy and objective determination. Let's see why.

In our effort to learn to trade options successfully, we must consider the risk factors associated with our trade. For credit

spreads, there are three risk factors: *position risk*, *capital at risk* (or risk capital), and *portfolio risk*.

In our quest to understand *trading options for income*, we often hear from other traders that they lost a good portion of

their account on one or two bad trades. Why does this occur? Generally because the capital at risk on a trade is usually

too large a percentage of account size.

In our quest to understand *trading options for income*, we will look at entering monthly trades on a weekly basis: both

Strangles and wide Iron Condors on the SPX.

In our quest to understand *trading options for income*, we often consider selling an Iron Condor or Strangle just before

earnings announcement, when the option chain IV (implied volatility) is at its highest.

In our quest to understand *trading options for income*, we often consider various methods for adjusting positions when

being challenged. In this article, we look at adjustments to short Strangles.

In our quest to understand *trading options for income*, we often consider holding positions through earnings

announcements. In this article, we look at the risk associated with these events.

In our quest to understand *trading options for income*, we often consider whether increasing the width of a credit spread

would be better than simply increasing the number of credit spreads. In this article, we look at which approach provides a

better outcome.

In our quest to understand *trading options for income*, we often consider whether more complex option strategies can

outperform simple strategies. In this article, we compare the simple short Strangle to the more complex short Double

Ratio Spread to determine which performs better.

In our quest to understand *trading options for income*, we often consider ways to improve our entry criteria. In the past

we've looked at IV Rank greater than 50. Now we compare the Kelly criteria to IV Rank for the SPX using Iron Condors

(ICs).

In our quest to understand *trading options for income*, we often consider using wide Iron Condors (ICs) rather than

Strangles. Why? Because the IC requires far less margin (or buying power reduction) than the Strangle allowing smaller

accounts to trade the SPX (S&P 500 index).

In our quest to understand *trading options for income*, we recognize that IV Rank generally increases as the price of the

underlying declines. When IV Rank exceeds 50 percent, would this be an opportune time to put on a bullish position?

This article will test that theory using two bullish strategies: short Puts and short Put Ratio spreads.

In our quest to understand *trading options for income*, we often wonder if trading short strangles on the settlement of the

weekly NDX would be profitable. Unlike the SPX weekly, which PM settles on Friday, the NDX weekly AM settles on

Friday (having expired on the prior day, Thursday). The NDX is the index for the Nasdaq Composite.

In our quest to understand *trading options for income*, we rely on the Probability Model to determine the 1 SD (standard

deviation) *expected move* to located the position of our short strikes for a short Strangle (or Iron Condor). The question

is: just how accurate is the Probability Model relative to duration?

In our quest to understand *trading options for income*, we spend most of our time locating good chart patterns supported

by our favorite indicators, and often forget to consider the liquidity of the underlying's option chain. Not only does the lack

of liquidity make it difficult to adjust or exit a position, it has a steep cost due to wider bid/ask spreads.

by Ronald Berg, OptionsAnnex.com

In our quest to understand *trading options for income*, we often wonder when the VIX is trading within a certain range

what the probability will be that the underlying will close or touch outside the 1 SD (standard deviation) expected move for

a short Strangle.

In our quest to understand *trading options for income*, we often consider strategies specific to earnings season, when

companies release their earnings reports. A bullish strategy (Sunnyside Up) is compared to a bearish strategy (Over

Easy).

In our quest to understand *trading options for income*, we often consider how we can use our *capital at risk* more

efficiently. A common metric is ROC (return on capital), and by converting ROC to a daily value we can use this figure as

a measure of efficiency for comparing various strategies.

In our quest to understand *trading options for income*, we often consider trading Strangles when IV Rank is high (over

50). Just how is the P&L affected if we trade when IV Rank is low as well?

In our quest to understand *trading options for income*, we often consider re-entering a trade after profitably managing a

winner. That is, immediately placing another Strangle in the same underlying, at the same risk level, after closing a

profitable trade. The expected advantage of capital redeployment is that we are more efficiently utilizing capital, and thus

improving our profits.

In our quest to understand *trading options for income*, we rely on the Probability Model to determine where to place our

short strikes for both the Strangle and Iron Condor (IC). Just how accurate is the Probability Model given a high IV

(implied volatility) environment is the focus of this article.

In our quest to understand *trading options for income*, we explore various strategies that provide high POP (probability of

profit) with a high ROC (return on capital). For small accounts, the Broken Wing Butterfly is a good candidate requiring

low margin, and will be the subject of this article.

In our quest to understand *trading options for income*, we often rely on indicators or studies to determine direction and

entry/exit points. This falls into the category of *technical analysis*, and Resistance and Support is a key technical

indicator. In this article we will discuss the efficacy of Support and Resistance.

In our quest to understand *trading options for income*, we use credit spreads (selling Iron Condors) when IV (implied

volatility) is high to generate consistent income. Does it make sense to use debit spreads (buying Iron Condors) when IV

is low?

In our quest to understand *trading options for income*, we often consider how we can use pivot points to help us trade

more effectively. Pivot points, in my opinion, are far more effective on an intraday basis, especially when combined with

volume using Market Profile.

In our quest to understand *trading options for income*, the topic of this article compares using stops vs. no stops when

using a strangle option strategy.

There are certainly numerous articles regarding the SPX (S&P500 index) and the SPY (ETF). This article will add to the

discussion focusing on why the SPX offers advantages for low risk income using credit spreads that the SPY cannot.

A recent article in the New York Times discussed a bulletin released by the SEC that shows the effects of fees and

expenses on your investment portfolio. The bulletin used a simple example to show that the impact of a 1 percent annual

fee on a $100,000 account earning just 4 percent annually over 20 years is far greater than one would imagine.

In our quest to understand *trading options for income*, we often consider Iron Condors. Once we determine the position

of the short strikes, the next issue is the width of the spreads. Many chose spreads separated by one strike, then

increase the number of Iron Condors to increase premium; others will widen the width of the spreads, then keep the

number of Iron Condors limited. The question is: which approach improves the P&L?

ShadowTrader - Extended hours and Expiration

This question on ShadowTrader discusses the risk posed by extended hours to option positions that have expired.

The Bible of Options Strategies

An excellent book by an excellent author. Guy Cohen has lots of experience on both the US and UK derivatives and stock markets.

Weekly Options: Increase Your Income Stream SPX

Weekly options are fairly new to the market and are increasing in popularity because they present the options investor with some unique opportunities to trade. Let's take a look at weekly options in more detail to see how they can be incorporated in to your trading plan.

Article from Shadow Trader

Peter,I recently viewed the James Dalton Webinar under your education section, and have a few basic questions regarding interpreting overnight markets.

Creating Consistent Option Income - 2 Safe Strategies

Creating consistent weekly income with option trading is possible. There are two strategies that we will explore in this article.

Income Generating Option Strategies

Income generating option strategies is option strategies that makes money when you enter the position. The income is generated when you sell option, either selling put option or buying put option.

10 Busted Myths of Options Trading

CEOs from top options trading brokerages offer advice

The 5 Rules of Options Trading

Many options traders lose money. Here's how to be one of the people who's taking it from them.

Exiting an Option Position

When you open an option position you have two choices: Buy it or Sell it. The actual orders used would be “buy to open" or “sell to open". Once you are long or short an option there are a number of things you can do to close the position.

Understanding Volatility

Volatility is often the most neglected of the major factors that influence option prices. But we make sure never to make that mistake when we consider possible trade recommendations. Every asset has quiet periods when its options are cheap, and volatile periods when its options are expensive, so understanding volatility is a vitally important consideration in options trading.

Fractal Position Management

Traders must manage risk carefully, instituting tight reins on their options, spreads and portfolio. The management technique of each is essentially the same because position management is fractal.

Master Support and Resistance

Whether you're a Day Trader or Position/Swing Trader, the use of Support / Resistance areas are a key technical indicator for many traders.

Effect of Dividends on Option Pricing

Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date.

Options: Lowering The Cost of Insurance

Let's face it; we want the best of both worlds. We want upside potential on our stocks and no downside risk. The hard part is finding a strategy that targets this combination. Fortunately, options give us more than one alternative.

Understanding Put-Call Parity

Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969.

Understanding Time Premium

What is an option and what gives it value? This week, we take a look at why options are insurance against financial uncertainty and why this insurance is often very reasonably priced.

When Leading Stocks Stop Leading

When I see the S&P continue to make new highs, but the stocks I'm in - Facebook being a prime example - are not following this move higher, makes me wonder if I should just be long SPY options at this point in time rather than in individual stocks.

It's all about Context

Successful traders use indicators as a potential trade setup, but within the context of other information (typically news or events affecting the markets).

Pinning on AAPL - ShadowTrader

This post on ShadowTrader responds to a question regarding*pinning* a price on Apple and whether volume plays a role.

Overnight Inventory - ShadowTrader

This post on ShadowTrader discusses how overnight inventory impacts the Opening.

This question on ShadowTrader discusses the risk posed by extended hours to option positions that have expired.

The Bible of Options Strategies

An excellent book by an excellent author. Guy Cohen has lots of experience on both the US and UK derivatives and stock markets.

Weekly Options: Increase Your Income Stream SPX

Weekly options are fairly new to the market and are increasing in popularity because they present the options investor with some unique opportunities to trade. Let's take a look at weekly options in more detail to see how they can be incorporated in to your trading plan.

Article from Shadow Trader

Peter,I recently viewed the James Dalton Webinar under your education section, and have a few basic questions regarding interpreting overnight markets.

Creating Consistent Option Income - 2 Safe Strategies

Creating consistent weekly income with option trading is possible. There are two strategies that we will explore in this article.

Income Generating Option Strategies

Income generating option strategies is option strategies that makes money when you enter the position. The income is generated when you sell option, either selling put option or buying put option.

10 Busted Myths of Options Trading

CEOs from top options trading brokerages offer advice

The 5 Rules of Options Trading

Many options traders lose money. Here's how to be one of the people who's taking it from them.

Exiting an Option Position

When you open an option position you have two choices: Buy it or Sell it. The actual orders used would be “buy to open" or “sell to open". Once you are long or short an option there are a number of things you can do to close the position.

Understanding Volatility

Volatility is often the most neglected of the major factors that influence option prices. But we make sure never to make that mistake when we consider possible trade recommendations. Every asset has quiet periods when its options are cheap, and volatile periods when its options are expensive, so understanding volatility is a vitally important consideration in options trading.

Fractal Position Management

Traders must manage risk carefully, instituting tight reins on their options, spreads and portfolio. The management technique of each is essentially the same because position management is fractal.

Master Support and Resistance

Whether you're a Day Trader or Position/Swing Trader, the use of Support / Resistance areas are a key technical indicator for many traders.

Effect of Dividends on Option Pricing

Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date.

Options: Lowering The Cost of Insurance

Let's face it; we want the best of both worlds. We want upside potential on our stocks and no downside risk. The hard part is finding a strategy that targets this combination. Fortunately, options give us more than one alternative.

Understanding Put-Call Parity

Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969.

Understanding Time Premium

What is an option and what gives it value? This week, we take a look at why options are insurance against financial uncertainty and why this insurance is often very reasonably priced.

When Leading Stocks Stop Leading

When I see the S&P continue to make new highs, but the stocks I'm in - Facebook being a prime example - are not following this move higher, makes me wonder if I should just be long SPY options at this point in time rather than in individual stocks.

It's all about Context

Successful traders use indicators as a potential trade setup, but within the context of other information (typically news or events affecting the markets).

Pinning on AAPL - ShadowTrader

This post on ShadowTrader responds to a question regarding

Overnight Inventory - ShadowTrader

This post on ShadowTrader discusses how overnight inventory impacts the Opening.