What Are The Stocks To Trade Options With?

A crucial difference exists between stock investing and trading.

When we talk about investing in stocks, we're talking about taking a longer-term approach. This involves looking deeply into the fundamentals of a company, such as its financial health, performance history, and growth potential. Essentially, it's like trying to understand the company's story and how it's likely to evolve over time.

On the flip side, trading is a more short-term game. In this scenario, we're not as concerned with the company's long-term prospects. Instead, our primary focus is on liquidity, which refers to how easily we can buy or sell a stock in the market. 

In this article, I'll be shedding light on the specific stocks that catch my attention when I'm involved in the trading of options.

The Three Golden Criteria for Underlying Stock

When venturing into the realm of option trading, a thoughtful approach to selecting underlying stocks is crucial. Several key criteria guide my choices to increase the odds of my success, when it comes to options selling:

#1. Stocks from S&P 500: My preference gravitates towards companies with a substantial market capitalization. To align with this preference, I exclusively focus on stocks listed in the S&P 500. The rationale behind this lies in the stability and reliability often associated with larger market cap companies. Moreover, opting for S&P 500 stocks provides the added benefit of having options available for virtually all stocks in this index, enhancing the diversity of my trading opportunities.

#2. Stock Trading Volume > 3M: Liquidity stands as a cornerstone in the world of trading. It ensures the ability to swiftly open and close positions without encountering significant hurdles. To guarantee this liquidity, I set a minimum trading volume threshold of 3 million shares for the stocks I consider. This analogy can be likened to owning valuable properties; their true worth is only realized if there's a ready market of buyers when the decision to sell is made.

Typically, if the underlying stock has high liquidity - the options will have higher liquidity (and hence tighter bid-ask spread too).

#3. Minimum Stock Price > $50: Beyond the qualitative aspects, the quantitative consideration of stock price plays a pivotal role in my selection process. I set a minimum stock price threshold of $50. This criterion aims to strike a balance, ensuring that the stock price is not too low, as excessively low-priced stocks often yield minimal option premiums. By maintaining a minimum stock price, I optimize the potential return on each option contract while managing the associated commission costs.

The reason for this is because the way commission fees are structured on a per-contract basis.

This means that the more contracts you sell, the more commission you would incur.

Let's a look at two examples - to ensure consistency, we will compare two options with (i) the same expiry and (ii) similar delta - as these are factors that can affect the premium collected.

Is There An Easier Way To Filter All These??

Having outlined the three essential criteria, it would be inappropriate of me not to provide you with a convenient method for sorting through stocks that exhibit robust option cash flow. <After all, since you're here on this blog, you deserve top-notch insights!>

Personally, I employ a free screening tool available on Finviz to efficiently identify stocks that align with the aforementioned criteria.

Allow me to guide you on its utilization.

What's the Next Step?

Discovering the ideal stocks for options is just one piece of the puzzle.

The real thrill begins when you assemble these stocks into a watchlist, keeping a keen eye on them, eagerly anticipating the perfect moment for a trading opportunity.

And if you happen to be unsure about the entry rules for options – guess what? You're in for a treat!

I've put together a free Options Cheatsheet, accompanied by an comprehensive video training. Click below to dive into the excitement and learn more.