Best Stocks for Options Trading

Best Stocks for Options Trading

7 min read

Do you know what are the best stocks for options trading? Options are a great way to to grow your account. And knowing which ones are better, and why is extremely helpful. However, options have more moving parts than stocks. As a result, they’re trickier to learn. Moreover, if you’re willing to put in the work, you can grow a small account successfully. Many times people will 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 what are the best stocks for options trading. Options have a reputation for being difficult to master. As a result, it scares people are 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

My Top 10 ETFS and Stocks for Trading Options

Perhaps you dream of trading the heavy hitters like $AAP, $FB, $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 times 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 in the world won’t work if you’re trading the wrong stocks and ETFs.

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

If you use low-grade concrete and poor building materials, it will tumble faster than a deck of cards in a hurricane.

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

The foundation for ALL of my strategies 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 that are 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 are the best stocks for options trading is ones that are liquid.

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, this means that 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 on the day, and at least 1000+ open interest.

High Open Interest

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

To put in simple terms, if the open interest on any give call or put was 1,000, there are currently 1,000 options still active to be exercised or sold. Therefore, if you see an option that’s traded 500 times a day with an open interest of 10,000, it’s vastly more liquid for traders compared to an option that trades only 10 times a day with an open interest of 1,000. Makes sense right?

Do you know see why is 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 getting option orders filled at good prices increase dramatically.

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

How Do You Choose Stocks for Options Trading?

  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 IV is high

Why You Need Volume

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

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

Needless to say, options volume can and does vary dramatically in any underlying asset you’re trading. Whether it be ETFs or stocks, you must pay attention to the volume.

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

Example of Using the Bid/Ask Spread

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, with a spread (the difference between ask and bid) of $0.03, it’s near perfect. 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, have to 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

A lot of times, 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 the exotic EFS, or options on thinly traded small-cap stocks.


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; and thirdly, the bid-ask spreads are tight.

  1. SPDR S&P 500 ETF Trust (SPY)
  2. PowerShares QQQ Trust (QQQ)
  3. iShares Russell 2000 ETF (IWM)
  4. SPDR Gold Trust (GLD)
  5. XLF (Finanical 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)

Get Started Now

In my opinion, 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. In fact, 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, then checkout this page on Barchart. They have a daily list updated with the highest volume options stocks! 

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

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