The items you want to place in your new assembly need to be sequential in the assembly tree. Move the part through the tree until they are all together - right now it looks like there is a bunch parts in the center of your selection that you do not want in the new sub assembly - they just need to be moved around.
Another way is to just grab a handful of the parts that are already sequential, make the sub assembly, then at the higher level assembly you can drag and drop them into the new sub-assembly. Good luck!
Forgot to add - This is the option I beleive your looking for...
Click on "Customize Menu" at the end of the pop up window and then make sure "Form New Sub-Assembly Here" is checked.
You also need to make sure that you've not selected any sub-assembly component i.e. all components should be independent or you should select the complete sub-assembly instead of it's child component.