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I have been writing recently (see articles here and here) about the factors that influence option prices.

Specifically, I’ve been talking about the things that affect the time value portion of an option’s price. Last time I described the effects of changes in “implied volatility,” which is another term for crowd expectations.Another major factor in the amount of time value in an option is the amount of time remaining until that option expires. The more time there is, the farther the stock could move in that time; and the farther into the money the option could get. So options with a lot of time remaining have a lot of time value, while those with little time remaining have less time value.Every option that today has very little time remaining, once had much more time remaining, and therefore more time value, than it has now.

So it must be true that options lose time value as time passes. In fact they do, and at a predictable rate. That rate is not the same every day. It starts out very slow and accelerates as time passes.

To understand why it must accelerate, think about this.At expiration, the underlying stock’s price will be at one and only one amount. All of the options that are in the money at that time (calls with strike prices below the closing price, and puts with strike prices above it) will have value. All others will be worthless.

Every option that is in the money at that time has a 100% chance of finishing in the money.
Every other option will have a 0% chance. Those are the only possibilities: 100% or zero percent.Right up until the moment of expiration, though, it wasn’t a 100% vs 0% situation.

As long as there was any time remaining during which the stock could move, the question as to whether any option would finish in the money was not absolutely certain.

The movement that could happen in the remaining time could still be decisive.But the closer the time gets to expiration, the smaller the amount of movement that is likely during that time. If a stock has moved an average of $1 a day over the past 30 days, the chances of its moving $5 today are pretty small. So if a given option would require that $5 move to get into the money, its time value will be very small.Let’s say that option, that is now about to expire, began life a year ago, and that the stock was the same price then as it is now ($5 away from the strike). Then, the chances of the stock moving $5 before expiration were much better – it had a year to do it.

The time was very valuable, because the movement that could happen in that time (a whole year) had a good chance of eventually placing the option in the money.With every passing day, the chance of that $5 movement decreases. At first, the difference is very small.

From day 365 to day 364, the difference in the probability of that $5 move barely changes, so the time value does the same. Several months later, the passing of a day will be a bigger deal. When there are 10 days to go for example, losing the next day will have a big impact on the chances of that $5 move.

We will have drawn one day closer to that moment when the probability will become zero. The difference between the chances on day 10 and day 9 are huge, where the difference between the chances on day 365 and 364 are trivial. So much more time value is lost with 10 days to go. Which was more than was lost with 11 days to go, and so on.The rate of loss of value due to time decay can be estimated quite precisely by the option pricing formula. It is one of the Greeks, or variables that describe option price changes.

It is called Theta. On our option chain, Theta is shown for every option. A Theta reading of .11 means that the option price will drop by eleven cents per share ($11.00 per contract) in the next day due to the passage of time. This is separate from any change that will occur due to the stock price moving. It is also separate from any option price change due to changes in crowd expectations about the stock (implied volatility).

In the last two weeks, we’ve discussed the effects on time value of crowd expectation, and of the time remaining until expiration. These are basic concepts that we build on in our option trading classes. They form part of the foundation that, with proper education, can help you to become a successful option trader.

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Chief currency strategist at DailyFX.com, John Kicklighter joins Merlin for a look at some of the events and data impacting currencies around the world. First comes the Euro, which has been flirting with a strong supply level, yet unable to break! John offers his thought on the ECB’s actions and why this is the line in the sand for the Euro. Later, the duo breaks down the current trajectory in the Pound and the Yen, both of which offer some great trading opportunities. Merlin also looks at some tools, such as the SSI, which helps traders
understand where the money is flowing in a variety of instruments



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New York Times best selling author and financial expert, John Mauldin joins Merlin and John for a look at the current drivers of innovation and change in our country. Topics range from Debt to Jobs, Technology to Energy. Previously on the show, Mr. Mauldin has talked about the fact that Jobs WILL come, just not sure where from. In this episode of Power Trading Radio, he sheds some light onto where job growth may come from, providing some trading and investing opportunities for listeners. John also talks about his book "Code Red" which is available now at Amazon.Com



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New traders often get confused when deciding what tools to use in order to analyze the markets and select trading opportunities. Looking at the selections available as well as the tools offered in today’s advanced trading software, it is easy for one to become overwhelmed. Fortunately, there is a simple and logistical way to sort through the market ebbs and flows and identify the highest probability, lowest risk trading opportunities.

When we are planning to trade, we need to start from the top. It does not matter if you are holding for 10 minutes, 10 days, or 10 weeks. The broad markets always have influence over the stocks making up their components. I have seen this hold true for markets in the U.S., India, London, Dubai, and Singapore. We need to establish the trend and potential turning points (supply & demand), of the broad market before we look to our individual stocks. Most stocks will move further and faster with the market’s trend than when they are fighting it.

Of course, there are always exceptions. However, even when the stock is trending opposite of the market, they will often reach supply and/or demand at nearly the same time.

Once we know what the market is likely to do during the timeframe we are trading, it is important to look at the stock to find the current trend. We want to know the direction of the trend, the strength of the trend, and the possible turning points in that trend (again supply and demand). By looking at the price and volume, a trader gains most of the knowledge they need to trade without the added use of any indicators. You can ascertain the trend direction and strength by observing the color, size, and shape of the candles themselves with volume as a supporting indicator. Looking at the past price action, a trader can also see the most probable turning points or entry and exit targets from supply and demand.

For those of you who are not familiar or comfortable with reading price and volume, I suggest you visit your local Online Trading Academy center and take one of our courses that will give you this knowledge. For added information regarding strength of the trend and confirming weakness at turning points, you can use a momentum indicator such as ADX or MACD. Even multiple moving averages offer a clue to a trader looking to determine trend strength. Just remember that you need to rely on price itself to make your entries and exits. Relying on the indicators makes you late as they are all lagging in their movement and signals.

When looking at the possible turning points of price, we can also look at the condition of oscillators like Stochastics, RCI, CCI and others. You have to use them in the correct manner however. Trying to take all buy and sell signals given by them will not only make your crazy, it will also drain your account. They are to be used to confirm decisions made on price action. Stocks will remain overbought or oversold for a long time in a strong trend. What you need to look for are clues that there is a change in sentiment and price action at a previously identified supply or demand zone.

Overall, your trading decisions need to be centered on identifying trends and supply and demand zones of the broad market and your stock. The technical indicators are decision support tools and may not even be necessary once you become adept at reading price.


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The Doctor is in the house for an episode dedicated to helping listeners overcome some of their trading challenges. Dr. Woody Johnson and Merlin offer solutions to several listener problems, including: fear of trading live, how to identify trading problems, inability to take losses and much more. Are you having trading issues? Tune in and find out if their solutions help you get past those obstacles. If not, send in your issues and they will discuss them on the next show.


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Coming off a whirlwind teaching tour, Master trader Russ Allen sits down with Merlin to talk about the new technology which allows him to teach traders online while watching each of their trading screens. This allows him to correct mistakes, and show proper trading techniques to traders who are in the comfort of their own homes, around the world. Later, Russ handles a couple listener questions about Implied volatility, and shows a couple tools to measure it. More importantly, he shares with listeners what IV means to a professional trader and why we should pay special attention to it. Merlin and Russ also discusses his upcoming Hour with the Pros, where he will be covering OCO and Bracket orders.




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May ended on a sweet note with all 4 major market indexes finishing up for the month. Will that continue in June? John O’Donnell joins Merlin for a big announcement about an upcoming event where Power Trading Radio will be broadcasting live with a ton of great speakers! John and Merlin also discuss the importance of metals and where the trading opportunities may lie.



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New orders for U.S. manufactured goods rose by more than expected in the month of April, according to a report released by the Commerce Department on Tuesday. The report said factory orders increased by 0.7 percent in April after jumping by an upwardly revised 1.5 percent in March.



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Back from a long motorcycle ride to teach in Kansas City, Brandon Wendell joins Merlin for a look at the global currency markets and listener questions! To start, Merlin looks at listener questions regarding Quicksilver and United Airlines, offering technical analysis for video viewers. Brandon takes a look at the US Dollar and its impact on the equity and commodity markets. This leads to a discussion of the Euro and its relative strength to a variety of other currencies. Finally, the duo offer suggestions on how to read volatility in the forex markets.



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With over 40 years of trading experience under his belt, President of Dohmen Capital Research, Bert Dohmen joins Merlin and John for a look at the current status of the markets. After creating a distinction between the market and the economy, Mr. Dohmen addresses several issues plaguing both and raising concern for another large correction in the near future. The trio talk about jobs, “Prelude to a Meltdown”, future market moves, FreedomFest and much more.



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