To make money, turn OFF the news. People get pretty surprised when they learn that I just don't care about the news.
They get the idea that, as a trader, I'm surrounded by screens with all the different financial news channels up, I've got a Bloomberg terminal over on this side, a live squawk on this side, above me I've got a news feed streaming.
But I don't have any of that…
Because the things I look at in order to make my trading decisions have nothing to do with the news or even what's going on in the world.
And these tools tell a truer story than what the screaming mad man on the screen ever could.
Go here to see how these tools help me win +80% of my trades.
Let me give you a little insight into those tools in this issue…
1. Probability OTM -- OTM stands for "Out of The Money." From previous Strike Price issues in this series, you know why I advocate SELLING options rather than BUYING options.
And as options sellers, we want our trades to stay OUT of the money.
So knowing the probability of a trade staying out of the money is a very important key indicator for me.
Take SPY for example. I want to know what the probability is that a particular SPY option will stay "out of the money" during the life of that option.
For example… Below you can see a screenshot of an "options chain." On the left side you can see I have circled 5 percentages.
70%...75%...77%...79%...83%  Now, to the right of these percentages (in the far right column) you see that they correspond with the strike price of each SPY option.
These options are set to expire in 18 days.
So what this is telling me is that, 18 days from now….
SPY has a 70% of NOT being at $296….
A 75% chance of NOT being at $297
A 77% chance of NOT being at $297.50
A 79% chance of NOT being at $298
And an 83% chance of NOT being at $299.
Here's what that would look like on an hourly chart:  This OTM% is based on an algorithm that is used to price options called The Black Scholes Model and it is HIGHLY accurate.
And what I try to look for are trades I can take that have between a 70% to 80% of being "OTM."
You may be asking, "But Andy…why not just take a trade that has a 99.9% probability of being OTM!"
And the simple answer is Because you won't make any money.
Here's the fact of the matter – the more risk you take, the more money you will make.
If you sell an option that has a 20% chance of OTM (meaning there is an 80% chance you will lose) you will initially collect a MUCH higher premium than if you sell an option that has an 80% chance of success.
But you're highly likely to lose money on the 20% OTM trade by the time the option expires.
Our goal is to put the probabilities in our favor between 70% and 80%, so we can still collect some nice cash premium, but not SO "low risk" that we don't really make any money.
The rest is all about good risk management.
Do this and you will be a profitable trader over time.
2. THETA – Theta is BAD NEWS if you are buying an option, but GOOD NEWS if you are selling one.
So what is it? Theta is a metric that lets you see the "rate of decay" on your options. It is how FAST the option will lose its value.
As options sellers, this is great for us. The faster the option loses its value and becomes worthless, the more money we get to keep.
Imagine buying a bright, new, shiny, juicy apple for $10 and then putting it on your kitchen table
Every day that passes by, that apple starts to go rotten and decompose.
Every day it starts to lose its value.
Now let's say you decide you don't actually want to eat that apple, and three days later you take it back to where you bought it from.
You bought it for $10, but because so much time went by and the apple is no longer in great conditions, the original seller buys it back for just $3.
So, the apple going bad is GOOD for the seller and BAD for the buyer.
As sellers, we want our options to "go rotten" as fast as possible. The faster they lose their value, the more money we get to keep, and the more likely we are to keep it.
So we especially want to look at options that are OVER priced and that are likely to decay in value fast.
The good news is, with the tools we use, we can actually see how much value our options will lose and how fast they will decay.
Did you know that approximately 80% of all options contracts expire worthless? That means it's very good to be a seller.
3. Mean Reversion: The next thing I look at are stocks that are ripe to "correct" back to their "mean." That sounds little tricky, but it's actually very simple.
Let's look at an example!  What you're looking at right there is an indicator called RSI ("Relative Strength Index") and that shaded area is the average price range of the stock (in this case SPY).
Now, when the price of the stock goes OUTSIDE of that shaded area it is either "overbought" or "oversold."
In this case we see it is "oversold."
And when that happens, the stock will typically "revert to the mean" – it will go back inside that expected range.
As you can see here, the price moved back inside that shaded area pretty quickly.
Now let's look at that on a chart.  As you can see, below is the area where the RSI showed us SPY was "oversold."
Immediately the price "reverted to the mean" by going straight up.
We LOVE to sell options when an asset like the S&P 500, Dow, Nasdaq, or Russell 2000 are in an over-bought or over-sold state.
Using these three methods, we don't worry about 'predicting' the markets and we don't worry about the news.
Our 3 indicators tell us everything we need to know.
And using this information we take profitable trades every single month.
For example, look at this entire year of our Options Advantage portfolio: Would you like to take trades like this?
Click here now.
See you in the next issue. If you have any questions about your subscription, please contact Customer Care at 866-447 8625 or 802-448-8410
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