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.
When looking for the best options to trade there are two important factors to consider:
- What is the implied volatility of the stock?
- What direction do you think it’s going? Are you bullish or bearish bias? Price target?
Looking at implied volatility can give hints 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 buy in the right direction, can also lose a lot.
A tool that can be of some 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.
Simple moving averages identify trends. If wanting to know when a long term trend is in effect or about to go into effect, SMAs confirm those moves.
Exponential moving averages are great when day trading. The 9 and 20 EMAs can help get a good entry and exit. VWAP is another great indicator to use alongside EMA/SMA and other technical analysis tools.
Calls and Puts
The moving averages help determine the trend now; next is to determine if calls or puts are the best options to trade. If bullish calls; then puts if bearish.
When bearish traders can buy and sell puts or write calls. A put is like shorting; sell the put and cover at the cheaper price. Not every broker has shares available to short but they will have puts available to buy and sell.
So if the platform you are using does not have a lot of available shorts; check out a platform like Interactive Brokers.
How Much Money Do You Need to Trade Options?
- No set amount but having $5,000 would also be suitable.
- The more capital available the more money able to per trade.
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. Options allow traders to be able to trade the high priced stocks without putting up as much capital; while able to profit from those moves, it can backfire also.
If the trend of the day is misjudged or get a bad entry, it can cost the entire trade. Especially with a stock that fluctuates dollars a day. Options contracts have expiration dates. If you get a bad entry but give yourself enough time, there is a chance you can recover.
Small cap stocks may not have the same volatility as the more expensive stocks, but can be great for swing trading. Option contracts allow the traders with less capital to be able to buy more and hold longer, allowing the profit target to materialize.
The best options to trade can be found no matter what type of trading style being used. The flexibility of options to day trade, swing trade, or long term trade can make be very useful to traders trying to be profitable. A way to help remember the difference between calls and puts. You “CALL UP” your friends, and “PUT DOWN” items.
Taking advantage of the tools and resources available will further your endeavors in the best way possible.
Take our options trading course to really test your knowledge on options.