Best Stocks for Options Trading

What Are the Best Stocks for Options Trading?

11 min read

Do you know what the best stocks are for options trading? Options are a great way to grow your account. They know which ones are better and why they are extremely helpful. However, options have more moving parts than stocks. As a result, they’re trickier to learn. Moreover, if you’re willing to work, you can grow a small account successfully. People often choose to grow a small account using penny stocks

  1. $AMD: Advanced Micro Devices
  2. $AAPL: Apple
  3. $GOOG: Google
  4. $NFLX: Netflix
  5. $FB: Facebook
  6. $ROKU: Roku
  7. $TSLA: Tesla Motors
  8. $NVDA: Nvidia
  9. $BA: Boeing
  10. $BABA: Ali Baba

The strategy you use will determine the best stocks for options trading. Options have a reputation for being difficult to master. As a result, it scares people away from them.

However, when you take the time to practice trading options, you’ll learn how they work and gain confidence.

Best Stocks for Options Trading

Top ETFS

Perhaps you dream of trading the heavy hitters like $AAP, $FB, and $TSLA. Gosh, their charts are nice! Wouldn’t it be nice to trade those in large lot sizes?

However, with individual share costs in the hundreds, often you’re stuck dabbling in the messy penny stock world or trading just a few shares of a large-cap stock.

Even the best strategies won’t work if you trade the wrong stocks and ETFs.

I don’t care if Warren Buffett endorses it as his winning strategy; it isn’t going to work if you pick crappy stocks. Think about your strategy, like the foundation of your house.

Using low-grade concrete and poor building materials will tumble faster than a deck of cards in a hurricane.

The same is true in trading, which leads me to my next point:

My strategies’ foundation starts with highly liquid ETFs and stocks.

If you want to win over the long term, you must use ONLY liquid options. Anything else will jeopardize the best strategies, even those Warren Buffett approved.

Why Liquidity Is Important

What do I mean by liquidity? Liquidity is a combination of two factors: the daily volume and open interest. If we don’t have high volume day in and day out and a high open interest in the options contracts…then I walk away.

Simply put, The answer to what the best stocks for options trading are are liquid ones.

Higher volume equals higher liquidity. The daily volume of a specific option contract is just the number of times that contract was traded on a specific day.

For example, say the daily volume of a General Motors $10 Dec 20 call option contract is 15; on that day, 15 options contracts to purchase $GM shares at $10 before Dec 2020 were traded. Not enough to draw me into the trade,

In the world of options, the higher this daily volume, the more liquid the option contract becomes. However, remember that each day brings a new daily volume, so it is not the most accurate measure of option liquidity. I prefer at least 100 to 1000+ volume daily and at least 1000+ open interest.

COMPANY
TradeStation ThinkorSwim Logo Tastytrade Logo
DESCRIPTION Experience TradeStation's professional-grade options trading platform, built for serious traders seeking value and power ThinkorSwim is for more advanced options traders. It features elite tools and lets you monitor the market, plan your strategy, and implement it in one convenient, easy-to-use, integrated place Trade options on stocks, ETFs, and broad-based indices. Trade equity and ETF options online for $1.00 per contract opening commission and $0 commission to close, capped at $10.00 per leg
HIGHLIGHTS

Large Cap Stocks vs Small Cap

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 trade 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 gets 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 they can be great for swing trading. Option contracts allow the traders with less capital to buy more and hold longer, allowing the profit target to materialize.

Why You Need Volume

Slippage. Slippage happens. You’ll have a wide bid-ask spread if the volume isn’t there. In the trading world, a wide bid-ask spread leads to what’s known as slippage.

The problem with slippage is that it makes getting the best price impossible. Shockingly, it could mean you must pay 5% to 15% extra just for the illiquidity. Yeah, no thanks. Over the year, this could add up if you’re not careful.

Options volume can vary dramatically in any underlying asset you’re trading. Whether ETFs or stocks, you must pay attention to the volume.

To put this in perspective, think about the volume difference between a stock like Facebook (FB) and a small-cap stock like Aquinox Pharmaceuticals, Inc. (AQXP)

Best Stocks for Options Trading Using 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 a 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.

High Open Interest

The higher the open interest, the more liquid the option contract. The second way to measure option liquidity is the option’s open interest. The open interest of an option contract is simply the number of outstanding options.

In simple terms, if the open interest on any given call or put was 1,000, there are currently 1,000 active options to be exercised or sold. Therefore, if you see an option traded 500 times a day with an open interest of 10,000, it’s vastly more liquid for traders than an option that trades only ten times a day with an open interest of 1,000. That makes sense.

Do you know to see why open interest is important? If there’s no interest, there’s no market for that option. A lot of open interest means a large number of buyers and sellers.

In other words, your odds of filling option orders at good prices increase dramatically.

An important point to remember: unlike options trading volume, open interest isn’t updated during the trading day.

Bid/Ask Spread Example

The SPDR S&P 500 ETF (SPY) is one of the most heavily traded ETFs in the market. As you can see in the image below, it’s near perfect with a spread (the difference between ask and bid) of $0.03. Ideally, that’s what you want to see.

What are the best stocks for options trading?

Why is this number important to you? Because if you buy at the ask and sell at the bid (or vice versa), you only have to make up at most $0.03, or 1.1%, on an option priced at $2.63-$2.66.

Hypothetically, let’s take the same option, but now the bid-ask spread is $0.25 wide. If this is the case, you must make up $0.125 or roughly 5%. And that’s the best-case scenario. Take a look at the top trading companies.

Wide Bid Ask Spread Options

Often, the bid-ask spread is upwards of $0.50 or more. Just look at the example above. The sad part about this is you’re already losing when you start. Don’t be that person. If I must give you any advice, it is this:

Steer clear of options on thinly traded small-cap stocks.

Moving Averages

A tool that can be of some use is 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 when to get in and out of a stock. The simple moving average is a great indicator of 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 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.

COURSE
Day Trading Course Options Trading Course Futures Trading Course
DESCRIPTION Learn how to read penny stock charts, premarket preparation, target buy and sell zones, scan for stocks to trade, and get ready for live day trading action
Learn how to buy and sell options, assignment options, implement vertical spreads, and the most popular strategies, and prepare for live options trading How to read futures charts, margin requirements, learn the COT report, indicators, and the most popular trading strategies, and prepare for live futures trading
INCLUDED

ETF’s

Now that we’ve got the importance of liquidity out of the way, here’s my list of the top 10 ETFs and stocks for trading options. And you may ask what I like about them. Firstly, they are all highly liquid. Secondly, they are all easy to trade; thirdly, the bid-ask spreads are tight.

  1. SPDR S&P 500 ETF Trust (SPY)
  2. PowerShares QQQ Trust (Q)
  3. iShares Russell 2000 ETF (IWM)
  4. SPDR Gold Trust (GLD)
  5. XLF (Financial ETF)
  6. XRT (Retail ETF)
  7. Dow Jones Industrial ETF (DIA)
  8. SPDR Energy Trust (XLE)
  9. SPDR Consumer Discretionary (XLY)
  10. XBI (Biotech ETF)

Final Thoughts: Best Stocks for Options Trading

The list above is a great starting point for trading. Unfortunately, most options traders lose because they haven’t taken the time to build their foundation of knowledge. But options don’t have to be risky. There are simple ways to earn a regular profit. Join us today, and we will show you how. If you’re looking for a daily list of the best stocks for options trading, check out this Barchart review. They have a daily list updated with the highest volume options stocks!

If you need more help, take our options trading course.

Frequently Asked Questions

When looking for the best options to trade, there are two important factors to consider:

  1. What is the implied volatility of the stock?
  2. 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 you buy in the right direction, you can also lose a lot.

  • No set amount, but having $5,000 would also be suitable
  • The more capital available, the more money able to per trade

Selling naked options is the most profitable options strategy but also the riskiest. Credit spreads are the safest but least profitable. Debit spreads are the safer in-between strategy.

Options trading is worth it if you want to trade large-cap stocks without needing a lot of capital. It is a risky trading strategy the requires knowing technical analysis.

  1. Here’s how you choose stocks for options trading:
  2. Trade large-cap and well-known stocks. News catalysts are helpful as they give a boost to the price action
  3. Make sure that they are highly liquid.
  4. Tight bid/ask spread. Usually, around 1-3$ is good
  5. Do fundamental research on Stock Rover as well as technical analysis
  6. As a general rule, buy calls and puts when IV is low, sell options when the IV is high

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