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09/09/2016
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cutting edge Analysis
Option Basics - Part 1
In Part 1, we will cover the Option Contract, Assignment and Exercise, and American and European style options.

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

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

Option Basics - Part 4
In Part 4 we will be discussing the important topic of Volatility; specifically the differences between Historical and Implied
volatilities.

Option Basics: Impact of FOMC on the Markets
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.

Option Basics: How to Trade the FOMC Announcement
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.

Option Basics: Debit vs. Credit spread
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.

Option Basics: Random Price Distribution
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).

Option Basics - Anatomy of a Losing Trade
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.

Option Basics - Buy into Weakness; Sell into Strength
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).

Option Basics - Beware of Theta (time decay)
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).

Option Basics - Criteria for Trade Entry
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.

Option Basics - Probability of Touch
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).

Option Basics: Adding to Positions when IV Rank Increases
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).

Option Basics - Position Size
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). 

Option Basics - Asset Protection
In this article, we will discuss how to protect an asset in your portfolio.

Option Basics - Portfolio Protection
In this segment, we will discuss how to properly protect a large portfolio of assets.

Option Basics - the Iron Condor
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.

Option Basics: Short Call Assignment
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.

Option Spreads - Advantages of Debit and Credit Spreads
If option spreads (vertical or horizontal) offer significant advantages, then why aren't there more spread trades? 

Option Spreads - Call Vertical Spreads
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.

Option Spreads - Put Vertical Spreads
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.

Option Spreads - Calendar Spreads
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.

What is Options Trading? Probability and Implied Volatility
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.

What is options trading? Probability of touch vs probability of loss
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.

What is Options Trading? Equivalent Risk
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.

What is Options Trading? Monthly vs Weekly Theta
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.

What is options trading? Credit spread vs the naked short
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'.

Consistent Income Trading Options - Karen the Super Trader
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.

Consistent Income Trading Options - the SPX
In this article we will discuss why trading the SPX, as Karen does, is the optimum approach when trading high probability
strategies.

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

Consistent income trading options: Implied volatility and expected move
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.

Consistent Income Trading Options - IV Ranking
In this article in this series, we will discuss IV (Implied Volatility) Ranking.

Consistent Income Trading Options: Impact of Implied Volatility (IV)
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).

Consistent Income Trading Options: Anatomy of a Calendar Spread
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.

Consistent Income Trading Options: Weekly vs. Monthly SPY Short Strangles
In our quest to understand trading options for income, the topic of this article is to compare Weekly vs. Monthly income
from short Strangles.

Consistent Income Trading Options: Trade Risk vs. Capital at Risk
In our quest to understand trading options for income, the topic of this article is the distinction and importance between
trade risk and capital at risk.

Consistent Income Trading Options: ATM Straddle Prior to Earnings
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.

Consistent Income Trading Options: Research Gone Bad
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.

Consistent Income Trading Options: Bull Strategy with High Implied Volatility
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?

Consistent Income Trading Options: Keeping it Simple
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.

Consistent income trading options: Market awareness
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.

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

Consistent income trading options: Theta efficiency
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.

Consistent income trading options: Low implied volatility strangles
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).

Consistent income trading options: Two common post-earnings strategies
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.

Consistent income trading options: Does buying premium when IV is low work?
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.

Consistent income trading options: Adjusting strangle based on IV Rank
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.

Consistent income trading options: Strangles vs. straddles with low IV rank
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).

Consistent income trading options: IV rank and scaling
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?

Consistent income trading options: Increasing capital deployment of the SPX
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.

Consistent income trading options: VXX and UVXY in low volatility
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.

Consistent income trading options: Low IV and rallies
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?

Consistent income trading options: Debit spreads and strangles
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?

Consistent income trading options: Comparing widths of SPX ICs
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.

Consistent income trading options: Implied vs. realized volatility
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).

Consistent income trading options: All about skew
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.

How to trade options successfully - the high probability income strategy
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.
How to trade options successfully: Risk factors trading option credit spreads
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.
Trading options for income: Position size is critical
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.

Trading options for income: Laddering strangles vs. wide iron condors
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.

Trading options for income: Earnings and expected move
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.

Trading options for income: Adjusting strangles
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.

Trading options for income: Earnings risk
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.

Trading options for income: Increasing spread width vs. number of spreads
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.

Trading options for income: Strangle vs. double ratio spread
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.

Trading options for income: The Kelly criterion vs. IV rank
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).

Trading options for income: Strangle vs. wide iron condor
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).

Trading options for income: High IV rank and price reversion
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.

Trading options for income: NDX settlement strangles
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.

Trading options for income: Probability model and duration
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?

Trading options for income: Liquidity counts
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.

Trading options for income: VIX impact on outcomes
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.

Trading options for income: Two earnings trades
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).

Trading options for income: Capital efficiency
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.

Trading options for income: Does IV Rank matter?
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?

Trading options for income: Capital redeployment
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.

Trading options for income: Strategy statistics
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.

Trading options for income: Broken Wing Butterfly
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.

Trading options for income: Resistance and Support
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.

Trading options for income: Debit spreads when IV is low
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?

Trading options for income: Pivot Points
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.
Easy trading strategy: Do stops work?
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.

The Case for Trading the SPX vs the SPY
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.

Investment Fees: How small fees have a big impact on portfolios
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.

Iron Condors: Bigger vs. Wider
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.