Options can be used to execute a broad range of trading strategies, from straightforward buy and sells to intricate spreads known as condors and butterflies. Furthermore, options are offered on a wide range of futures contracts, exchange-traded funds, stocks, currencies, and commodities.
For every asset, there are frequently hundreds of strike prices and expiration dates available. This can be confusing for someone who is new to options trading because there are so many options available.
Keywords: options trading, top stocks, SPY, QQQ, TSLA, NVDA, AAPL, IWM, AMD, GOOGL, AMZN, PLTR, volatility, calls, puts, covered calls, vertical spreads, straddles, strangles
Options trading can be a powerful tool for investors looking to gain exposure to the market, hedge their positions, or speculate on price movements. However, with thousands of symbols available, choosing the right stocks and ETFs for options trading can be a daunting task. This article will explore some of the top options trading candidates, focusing on volume, liquidity, and volatility.
Top Stocks for Options Trading:
The following table lists some of the most actively traded stocks and ETFs for options, based on their average daily call and put volume over the past month:
| Company | Avg Options Volume | Business |
|---|---|---|
| SPY | 7.9 million | Tracks the S&P 500 |
| QQQ | 3.7 million | Tracks the Nasdaq-100 |
| TSLA | 3.4 million | Electric cars |
| NVDA | 3.4 million | Semiconductors |
| AAPL | 1.3 million | iPhones, computers |
| IWM | 1.2 million | Tracks the Russell 2000 |
| AMD | 988,400 | Semiconductors |
| GOOGL | 483,500 | Internet |
| AMZN | 471,000 | E-commerce |
| PLTR | 440,300 | Software |
Factors to Consider:
Volume:
Volume is a key indicator of liquidity, which is the ease with which an asset can be bought or sold without affecting its price. Stocks and ETFs with high options volume tend to have tighter bid/ask spreads, making them more cost-effective to trade. Additionally, high volume allows for greater flexibility in using complex options strategies like vertical spreads.
Volatility:
Volatility refers to the degree of price fluctuations in an asset. Options tend to be more valuable when the underlying asset is more volatile, as they offer greater potential for profit. Traders can position for changes in volatility with strategies like straddles and strangles.
Underlying Asset:
The underlying asset of an option is the security that the option contract is based on. When choosing options to trade, it’s important to consider the characteristics of the underlying asset, such as its price, volatility, and liquidity.
Options Strategies:
Traders can use a variety of options strategies to achieve their investment goals. Some common strategies include:
- Covered calls: Selling call options against a long stock position to generate income.
- Vertical spreads: Combining options with different strike prices to create a defined risk and reward profile.
- Straddles: Buying both a call and a put option with the same strike price to profit from increased volatility.
- Strangles: Buying both a call and a put option with different strike prices to profit from a large price movement in either direction.
The top stocks for options trading are typically those with high volume, volatility, and liquidity. By considering these factors and choosing appropriate options strategies, traders can potentially enhance their returns and manage risk.
Additional Resources:
- Investopedia: Pick the Right Options to Trade in Six Steps: https://www.investopedia.com/articles/active-trading/111214/pick-right-options-trade-six-steps.asp
- TradeStation Market Insights: What Are the Top Stocks for Options Trading?: https://www.tradestation.com/insights/top-stocks-for-options-trading/
Disclaimer:
This article is for informational purposes only and should not be considered financial advice. Options trading can be complex and risky, and investors should carefully consider their risk tolerance and investment goals before engaging in such strategies. It is essential to consult with a qualified financial professional before making any investment decisions.
Devise a Strategy
You now understand your investment objective, the intended risk-reward payoff, the level of implied and historical volatility, and the significant events that could have an impact on the underlying asset based on the analysis carried out in the preceding steps. Finding a specific option strategy is much easier after following the four steps.
As an illustration, suppose you are a cautious investor with a substantial stock portfolio who wants to generate premium income before businesses start releasing their quarterly earnings in a few months. As a result, you might choose to use a covered call writing strategy, in which you write calls on a portion or all of the stocks in your portfolio.
As an additional illustration, if you are a risk-taking, aggressive investor who believes that the markets will see a significant decline in the next six months, you might choose to purchase puts on major stock indices.
Check the Volatility
One of the key factors influencing an option’s price is implied volatility, so be sure to understand how much implied volatility the options you are thinking about have. In order to determine your option trade or strategy, compare the implied volatility level to the historical volatility of the stock as well as the level of volatility in the overall market.
You can determine whether other traders anticipate significant movement in the stock by looking at implied volatility. If a trader believes that volatility will not continue to rise, high implied volatility will drive up premiums and make writing an option more appealing (which could increase the chance of the option being exercised) If a trader anticipates that the underlying stock will move sufficiently to increase the value of the options, low implied volatility translates into lower option premiums, which is advantageous when purchasing options.
Options Trading in 10 Minutes | How to Make $1,000 a day | For Beginners Only
FAQ
Which option trading is most profitable?
What types of options can I trade?
Types of options you want to trade: the two most common types of options contracts are calls or puts, and you’ll need to note which type of contract you want. Once you’ve provided the necessary information, your broker will review your contract request before confirming its approval. Investor tip: Options aren’t stock; they’re adjacent to stock.
How do I trade options?
Select the options contract you’d like to trade. Pay the premium and any commission to your broker, and take ownership of the contract. In practice, it’s unlikely you’ll exercise the options contract. If you made a profitable trade, you can sell the option for a gain before expiration. If the option expires worthless, there’s nothing to be done.
What is a good option trading strategy for beginners?
For long-term investors, monthly and yearly expiration dates are ideal. With dedicated time and practice, options trading for beginners is possible. A covered call is a good options trading strategy to start with—it offers limited return in exchange for limited risk, with the goal of generating income through options premiums.
What are the different types of options trading strategies?
Some basic strategies using options, however, can help a novice investor protect their downside and hedge market risk. Here we look at four such strategies: long calls, long puts, covered calls, protective puts, and straddles. Options trading can be complex, so be sure to understand the risks and rewards involved before diving in.