Best Options to Trade?
Finding the best options to trade can be one of the most challenging aspects of options trading. There are so many stock to chose from. Look for contracts with a high open interest over 1,000 and very tight big/ask spread. Liquidity and trading large well known stocks like $AAPL, $FB, $AMD, and $NFLX will be your bread and butter. Also, look to trade debit spreads and credit spreads to make the trade more affordable and less risky than trading naked options.
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What Are the Best Options to Trade?
When you’re looking for the best options to trade there are two important factors to consider. What is the implied volatility of the stock? And what direction do you think it’s going? When you look at implied volatility that gives you a hint about future volatility.
The more volatile the stock, the more it moves. The more it moves, the more money you make. The opposite is true also. If you don’t buy in the right direction, you can lose a lot also. What objective do you want to achieve with this trade? Are you bullish or bearish bias?
When you’re looking for the best options to trade, a tool you can use are moving averages. Moving averages smooth out price action and filter out the noise of random price fluctuations. There are simple moving averages and exponential moving averages.
You can use these moving averages as support and resistance. They can tell you when to get in and out of a stock. The simple moving average is a great indicator if you’re going to swing trade options.
Simple moving averages identify trends. If you want to know when a long term trend is in effect or about to go into affect, SMAs confirm those moves.
Exponential moving averages are great when you’re day trading. The 9 and 20 EMAs will help you get a good entry and exit. VWAP is another great indicator you can use.
Calls and Puts
The moving averages help you determine the trend now you can determine if calls or puts are the best options to trade. If you’re bullish calls are what you’ll be trading. If you’re bearish then it’s puts.
When you’re bearish you can buy puts or sell puts. Selling a put is like shorting. You sell the put and cover at the cheaper price. Not every broker has shares you can short but they’ll have puts you can buy and sell.
So if you don’t have a platform like Interactive Brokers where you can short, you’re not stuck missing out on those moves. Put options are considered the easiest options to trade.
How Much Money Do You Need to Trade Options?
- How much money do you need to trade options? There isn’t a set amount but having $10,000 or more would be a really good start. $5,000 would also be okay. The more capital you have the more money you can make per trade though.
Large Cap Stocks vs Small Cap Stocks
Some of the best options to trade are the large stocks like Amazon, Google and Alibaba. Stocks like these tend to move quite a bit throughout the day.
One stock options contract controls 100 shares of stock. So you can trade the high priced stocks without putting up as much capital. While you can profit quite a bit with those moves, it can backfire on you also.
If you misjudge the trend of the day or get a bad entry, it can cost you. Especially with a stock that moves dollars a day. Options contracts also have expiration dates. If you get a bad entry but give yourself enough time, there’s a chance you can recover.
Small cap stocks may not have the same volatility as the more expensive stocks, but they’re great for swing trading. You can buy more and hold longer, allowing your profit target to materialize.
The best options to trade can be found no matter what type of trader you are. The flexibility of options to day trade, swing trade or long term trade can make any trader profitable.
Taking advantage of the tools and resources available to you will further your endeavors in the best way possible.
If you need more help, take our options trading course.