Watch our video on stock options and what are the best stocks for options trading.
Do you know what are the best stocks for options trading? Options are a great way to to grow your account if you want to know how to invest in the stock market with little money.
Options have more moving parts than stocks. As a result, they're trickier to learn. However, if you're willing to put in the work, you can grow a small account. Many times we grow our small account using penny stocks. If you don't have a good penny stocks list than you're subject to the pump and dump.
Make sure to take a basic options trading course before going live with options. Once you've mastered the basics than learn advanced options strategies.
The strategy you use will determine what are the best stocks for options trading. Options have a reputation for being difficult. 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.
Perhaps you dream of trading the heavy hitters like AAPL, 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, you’re stuck dabbling in the messy penny stock world.
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 options strategies starts with highly liquid, optionable 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.
You must use only liquid options. Check out our swing trade room to see options trading in action.
What do I mean by liquidity? Liquidity is a combination of two factors: the daily volume and open interest.
As a result, the answer to what are the best stocks for options trading are 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 18 call option contract is 15, this means that on that day, 15 options contracts to purchase Ford shares at $10 before Dec 2018 were traded.
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.
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 - Ford $10 Dec 18 in our example, which currently have not been closed out or exercised.
To put in simple terms, if the open interest 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.
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.
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. Take our basic stock course.
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)
Check out our real time stock alerts for entries and exits into options trades we're taking.
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.
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.
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.
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.
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