Hello trader,

They say there is nothing certain in life besides death and taxes.

I disagree.  

Unfortunately, in trading, there are no certainties either.  The only thing a trader can do is find ways of stacking the house odds in their favor and executing their strategy.

If the strategy has an edge and they stuck to their trading plan then profitability should be right around the corner.

That’s exactly what my trading strategy does for me.  

It finds me the perfect setups and delivers timely market signals that deliver win after win.

In fact, since starting this service last year I have yet to see a losing trade, and consistently racking in win after win on every trade.

So, what’s my secret?


Source: Think-or-Swim


Let me ask.  Do you see anything from this chart?

You probably don’t.  And that is ok!

But to me, this is 1 step away from being a perfect trade

Let me explain.


Bollinger Bands


Bollinger Bands were developed by John Bollinger.  This technical analysis tool is defined by calculating two standard deviations from the average price based over a specific time.

Two standard deviations is a mathematical term that states a stock’s price should fall within that range 95% of the time.

And this is all statistics and probabilities I won’t bore you with here.

Let’s take a look at what I mean…


Source: Think-or-Swim


As you can see, the price of FB’s stock rarely traded outside of this band.

And if it did.. Well it quickly traded back inside of it!

You know the best part…

All you had to do as a trader is wait for the price to trade under those Bollinger Bands and you would have won every single trade on that stock.

Talk about stacking the odds in your favor!



The Put Credit Spread


When I want to trade a stock like FB or AAPL above,  there are only 3 real options you can choose from.

Trading choices you can make for this trade are:

  1. Buying stocks
  2. Buying calls 
  3. Selling Puts

As a stock slowly grinds higher, I don’t want to buy the underlying stock as it ties up too much capital and I don’t get paid for my risk.  The same reasoning applies to buying call options as well, there is just no upfront payment to take this trade.

Now with selling puts, I am able to still participate in a bullish trade and get paid to do so!

A put credit spread involves selling one put option at a strike below the current price and buying a put option at a lower strike price.  Both options will have the same expiration.

When you trade this strategy you will receive a credit upfront for taking this position.  The maximum profits you can make on this trade is the credit you received when the stock trades above the upper strike at expiration.  The maximum loss on this trade is calculated by the distance between strikes minus the credit received.

For example:

  • I sell the $200 put strike that expires next month
  • I buy the $195 put strike that expires next month
  • I receive $1.00 for my trade, or $100 per spread
  • My maximum loss is $400 per spread ( 200 – 195 – 1 * 100 = $400 )

If this strategy is executed correctly, you are looking at 100% ROI on your trade when the options expire worthlessly!


Putting it all together


This is where statistics and probability really shine and make for that almost guaranteed winning trade.

Not only do I trade using an indicator that tells me 95% of the time price will stay inside a range, but I also combine it with an options strategy that can pay me 100% ROI on my trade!

So what makes this trade a really high probability winner. 

  1. The Options sellers always have statistical advantages over buyers.  That’s a built-in feature for the entire options market, regardless of calls or puts.
  2. Trading credit spreads can pay me 100% returns, which cannot be done when buying calls or even the stock outright.
  3. Lastly, combining a proven indicator into my trading system that when signals a stock is oversold both statistically and on the charts.  Remember, there is a 95% chance it will head higher and not lower.

So want to learn exactly how I put this all together and more with that other indicator you may have noticed at the bottom of the charts?

Well to find out – click here to join Options Profit Planner today

Author: Dave Lukas

Hearing the word “Options” puts fear into the eyes of investors and traders…but it shouldn’t!

Some investors and traders believe that options are high-risk betting instruments… but that is not true!  

Much of the risk associated with options boils down to one of three reasons: a lack of education, experience, and understanding. 

Do you think that trading options can be less risky than trading stocks.

Well, it’s true, they can be far less risky than trading stocks.    

So, with understanding the basics of how options work, you will soon be able to reap the rewards of owning stock all while limiting risk!

But before you can begin slinging options for extraordinary returns… you must master the basics first. That’s what today’s lesson is all about.


Calls and Puts – Overview


You might have had success beating the markets by trading stocks using a strict process anticipating a move up or down. 

But unfortunately this success does not simply translate from stocks to options without fully understanding their unique characteristics.  

It’s important to understand how options work in order to trade them correctly and know where and when your position is open to risk.

Options contracts are priced using mathematical models such as the Black-Scholes and Binomial pricing models.

The primary drivers of the price of an option are:  

  • Current stock price
  • Intrinsic value
  • Time to expiration or the time value
  • Volatility (Historical)
  • Interest rates
  • Cash dividends paid

Let’s start with the primary drivers of price of an option: the current stock price, intrinsic value, time value, and volatility.


The current stock price


This is fairly straightforward, but the movement of the underlying stock price will impact the option pricing.  

If the stock price rises, it is likely the price of the call option will increase and the price of a put option will fall.

And if the stock price decreases, it is likely that the price of the call option will decrease and the price of a put option will increase.


Intrinsic Value


The intrinsic value is the value any option would have if it was exercised today.  This value is the amount by which the strike price of an option is in-the-money (ITM).  It is the portion of an option’s price that was not impacted by the passing of time.  

Note:  Options trading at-the-money (ATM) or out-of-the-money (OTM) have no intrinsic value

This equation is how to calculate intrinsic value:

Call Option Intrinsic Value = Underlying Stock Price – Call Strike Price

Put Option Intrinsic Value = Put Strike Price – Underlying Stock Price

For Example:

Let’s assume Apple (AAPL) stock is selling at $300.  The 295 call option would have an intrinsic value of $5.00 because the option holder can exercise his option to buy AAPL shares at $295 then turn around and sell them in the market for $300, or a profit of $5.00


Extrinsic Value


The Extrinsic Value (time value) of options is the amount by which the price of an option exceeds the intrinsic value.  

This value is directly related to how much time an option has before it expires including any projected implied volatility of the stock.

This equation how to calculate extrinsic value is:

Time Value = Options Price – Intrinsic Value

The more time an option has until it expires, the greater the chance it will end up in the money.  Time value is essentially the risk premium the option seller requires to provide the option buyer the right to buy/sell the stock at or before the date the option expires.    

For example,  If AAPL is trading at $300 and the 30 Days Till Expiration (DTE) call is trading at $6, the time value of the option is ($6 – $5) = $1.00

An options time value is also highly dependent on the volatility the markets expect the stock to have at expiration.  One measurement of volatility in stocks is by using the company’s beta. A “high beta” is said to be more volatile compared with “low beta” stocks.




The effect of volatility is extremely difficult to measure and is highly impacted by a traders fear and greed. 

There are two types, implied volatility and historical volatility.  Implied volatility is the volatility in the options markets, where historical volatility is the volatility in the stock price.  


Historical Volatility


Historical volatility helps a trader to determine the possible magnitude of future moves of the underlying stock.  

Statistically, two-thirds or three-quarters of all recent price movement will happen plus or minus one standard deviation of the stock’s move over a set time period.  Historical volatility looks back in time to show how volatile the stock has been.  

This is extremely important for options traders to determine which price is most appropriate to select for their specific strategy.


Implied Volatility


Implied Volatility is what is implied by the current options prices and is generated from an options pricing model.  

This value helps set the current price of an existing option and helps players assess the potential of a trade.  

Implied volatility is a sentiment indicator as well and helps to give options traders what the current market expects future volatility to be. 

This future sentiment is reflected in the price of the option and has based on current option prices.




The bottom line is this…

Any options trader should really take the time to study the various options pricing models.  This is a must to understand how options are priced.

Besides the underlying price, the key factors of the option price are intrinsic value, volatility, and time value.  Knowing the current and expected volatility in the price of an option is critical for any investor who wants to take advantage of the movement of a stock.  

And this is all available without spending countless hours studying options.  Just click here to start following along as it’s been more than 6 months without a losing trade!

Author: Dave Lukas

Hello trader,

Historical volatility, Implied volatility, greeks…

There is too much to keep track of when it comes down to getting started.  

But the more advanced you get and the more money you decide to pour into your options account, the better you’ll be enhancing your knowledge beyond the basics.  

One of the most critical concepts to learn in all of options trading is Implied Volatility. 

But it’s more than just a concept. It’s an essential ingredient in the options pricing model. 

If you catch yourself on the wrong side of volatility and it can be a disaster. However, when you’re on the right side of the volatility trade, profits can be big and come in fast. 

Today’s lesson is about getting you familiar with implied volatility, and how it affects everything we do with options.


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Implied Volatility – Overview


Implied Volatility represents the expected volatility over the life of the option contract for the specific stock.

As excitement rises and falls, implied volatility will increase and decrease the value of the options contracts.  

Options that have a high level of implied volatility will result in high priced or overpriced options premiums.

Alternatively, options that have a low level of implied volatility will result in a lower price and possibly underpriced options premiums.

If you owned a stock when implied volatility increases, the value of these options will also increase. And the same happens if implied volatility decreases, the value of these options will also decrease.

When looking at the options chain, each listed option has its own unique sensitivity to implied volatility.  This is called Vega.

For example, a shorter-dated option contract will have less impact on implied volatility than a longer-dated option contract.

Each strike price will also respond differently to implied volatility changes.  Options with strike prices ATM are the most sensitive to changes in implied volatility,  while options that are further ITM or OTM will have less sensitivity to implied volatility.  


How to use Implied Volatility


One effective way to analyze implied volatility is to examine a chart of stocks with implied volatility.  

For example, if you look at the chart of  52-week chart of IV on AAPL, you can immediately notice two things. 



What stands out:

  1. Spikes in IV align with larger bar movement of the underlying stock.
  2. IV Ranking is range bound and lets you quickly identify overbought/oversold zones.

Because each stock has a unique implied volatility range, these values are not to be compared on another stock’s volatility.  


Using Implied Volatility to determine a strategy


You’ve probably heard the term, buy low sell high… and there is no difference for IV… 

Buy undervalued options and sell overvalued options.

Now I know it might be sounding too complex but it is much easier than you would think.



In this chart, you can see Theta, or the value added by increased volatility on AAPL.  


Four Things To Consider


  1. Make sure you can determine whether IV is high or low prior to getting into a trend reversal trade.  Remember, as IV increases, options prices are becoming higher.  


  1. If you come across periods of high volatility, it is most likely caused by some external force.  It’s best to check for reasons that may be causing IV to be elevated, such as mergers, earnings or other announcements.


  1. When you see options trading with high implied volatility levels, it’s best to target option selling strategies.  As options premiums are elevated, it’s best to avoid purchasing options and it might be more desirable to sell. Some strategies are covered calls, naked puts, short straddles, and other various credit spreads.


  1. When you see options trading with lower Implied Volatility levels, it’s best to target option buying strategies.  As options premiums are suppressed, it’s best to purchase options instead of selling options. Some strategies are buying calls, buying puts, buying long straddles, and other various debit spreads.  


One way to trade implied volatility is through a strategy called Mean Reversion.  Let’s take a look at that closer.



What is mean reversion 


Implied volatility has a mean-reverting tendency – meaning there are periods when it moves away from its historical average and then reverts back to the average.  

A reversion to the mean involves retracing any price back to a previous average.  In options, it is thought that as price strays far enough away from its longer-term norm it will revert back to an average value.



In this example above, you can easily see the 6 points where implied volatility spiked and relative to historical values suggested that it should revert back to its long-term average.

Another way to determine low vs high IV levels is to use a built-in statistics tool found in Think Or Swim (Make sure to check with your respective brokerage for their IV statistics).



As a general rule, some traders will sell credit spreads when IV is between 67% and 100% percentile of its 52-week range.  

Key points:

  • Mean reversion suggests asset prices and historical returns revert to long term average levels
  • Mean reversion has led to many investment strategies in options trading
  • Mean reversion tries to capitalize on extreme changes in the price of a security, assuming it will revert to a previous price.


Wrapping Up


There are many reasons an options implied volatility may deviate from its averages.  Some examples include upcoming earnings announcements, fed announcements or an upcoming merger and acquisition.

The key is to recognize when implied volatility is high compared to its historical highs.  When it appears to be extended compared to past values, options traders should structure a trade accordingly.  

The process of selecting option strategies, an expiration month and strike price, things can start to get complicated very fast.  

But one factor you never want to overlook is Implied Volatility on that stock.  

It is wise to always gauge the impact of what IV has on selecting your strategies.  

There are a few things to remember about implied volatility:  

  • Bearish markets increase volatility
  • Bullish markets decrease volatility
  • Implied Volatility is a proxy for emotions of the underlying market and can be erratic 
  • It’s possible to align the underlying stock direction to the IV level to combine stock movement with shorting IV
  • Implied volatility trading comes with built-in entry and exit prices for your trade.
Author: Dave Lukas

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