The Best Stocks for Options Trading

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mentor blog, options blog, option, options, best stocks, best options, best optionOften I am asked, “What stocks are the best for options trading?”

Many people like to trade the indices for their tax-favored status whenever they trade options. Indices such as SPX and RUT get the 60/40 tax favored status.

Also there are many traders who like to trade stocks. Whenever you begin to look for a stock to trade with options strategies, you need to look for a stock that is relatively peaceful, perhaps in a trend or maybe post earnings release. The stock needs to have good option liquidity.

Best Liquidity Number

What is a good liquidity number? I like to use a rule of thumb, that for any strike that I’m going to use in my options trading strategy, there is 20 to 40 times the size of my position minimum in open interest in that strike.

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The more open interest that you have in a strike, the better your fills will be, as there are more people buying and selling at that level. Be careful to avoid stocks that are soon to gain media attention, such as a big product announcement, company take-over offers, or earnings reports.

Speculative Options Strategies

That is, of course, you are placing speculative options strategies on the event.

Those events can all cause larger movement in the stock price. One last word of advice; be careful not to be short in the money calls, whenever a stock is paying a dividend.

That will often be an event that will get you exercised early and you will be forced to pay the dividend.

Stocks for Options Trading

Some good stocks for options trading that I and my mentoring students regularly employ include: GOOG, IBM, AAPL, NFLX and PCLN, to name a few.

The best stocks to use will be the higher-priced stocked, generally over $100 and many times many hundreds of dollars, because those stocks generate larger option premiums due to their size.

These stocks can all be used for both directional and non-directional option trading strategies.

-Mark Fenton, Senior Options Mentor

Do you have more questions or topic ideas? Submit them here!


Trading Options Successfully

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Over the past seven years, I have been a full-time trader and options trading mentor. I have found, over that time, that becoming a mentor has helped my trading, just as much as or more than any other thing that I’ve ever done to improve my trading.

As a mentor, I see day-in and day-out what works and what doesn’t. So whenever someone asks me, “How can I trade options successfully?” I think I can speak with some experience.

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How to Be Successful at Trading Options

The most important thing you need to being a successful options trader is to have a plan. The plan requires answers to these questions:

  • What will I trade?
  • How will I trade it?
  • What will my profit goal be?
  • What will my max loss be?

 

A very important part of the plan is that the plan has to be a good one, meaning I have to find a valid option strategy, and I have to understand how stock or indexes that I use, move. The plan must involve:

  • Which options I’m going to use?
  • Which underlying (and the strategy)?
  • When I’m going to enter the trade?
  • How will I manage the trade if it works for me/ against me?
  • How can I hedge my risk?
  • How can I adjust my trade?

Those are all very important things you must know before you ever enter a trade!

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Be sure to check out our online options courses.

Have a Plan

Many times I see traders who think they have a plan, but once they enter a trade, they change around what they are going to do. They then become listless and indecisive, which causes problems.

You must have your plan and stick with your plan and adjust it only over time.

Do not follow every emotion and whim that you have, while you are in a trade. I think it’s also important to not only have a strategy and a plan, but also to have trading goals.

You should keep a written record of your trading goals and your trade results over time, so you can see for yourself what works for you and what doesn’t, allowing you make changes along the way.

Risk Management

Risk management is also key along with having a max loss number and adjustment plans. Many times, when you are making a monthly living in options trading, it’s really not how much money you make when you win, it’s how much money you do not lose when you lose.

If you have a 10% profit goal each month and you are successful most months, that will work, if, maybe you only lose 10-15%. However, if you are losing 30% and 40%, that will become a problem.

Accountability

Lastly, you need some accountability. I found for myself and for other traders that, if you have someone to talk to about your trades and to give you a second set of eyes to look at them and give you some guidance, I think that will do great things for your trading and take you to new levels of ability and success.

One-on-One Mentoring

This is why, at Sheridan Mentoring, we feel that One-on-One mentoring is the best process for developing traders. Trading can often be solitary and when you get out on your own, you tend to lose your way.

Having someone checking in with you, who you feel accountable to, will keep you on the right track and make your trading much more successful.
mark fenton, senior mentor
Mark Fenton, Senior Mentor at Sheridan Options Mentoring

Do you have more questions or topic ideas? Submit them here!


Credit Spread Option Strategy

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credit spread option strategy One of the most basic option trading strategies is to sell a credit spread.  This is usually done whenever the trader has an opinion on a stock or other underlying issue that it is going to go up or down in price, in a certain period. For instance, let’s suppose APPL was trading at $106 per share and you thought that APPL would stay above 100 for the next few months, you might sell the December APPL 100 Put and then buy the December 90 Put; thereby creating a credit spread, because the 100 Put you sold would be more valuable than the one that you bought at 90. As long as APPL stays above 100, the duration of the trade, that is until December expiration, you will be profitable . You have time decay on your side in this trade, that is, it’s positive theta. Each day that passes by, the short you sold is worth a little bit less in time value. This is how you make your profit over time.

Often the difficult part of this type of strategy is the management plan. What do I do if APPL does drop in price towards our below $100? One strategy that you can utilize is using your P&L percentage of profit, or percentage of loss, as your guide to either make adjustments to the trade or to close the trade. For instance, you could use a guideline: If the trade is up 10% on profit, I will close the trade or close half the trade and maybe let the rest go for higher profit. And conversely, if the trade is down 10%, I will close half the trade or even all the trade. This type of risk management will prevent you from just staring at the screen while APPL goes down further and further and your loss deepens. Of course, the percentages you use are up to you and what works with your portfolio level and your level of conviction of APPL’s movements. Always have a plan such as this, though, that prevents catastrophic losses or at least losses that outpace your gains from previous trades.

Mark Fenton- Senior Mentor at Sheridan Options Mentoring

Do you have more questions or topic ideas? Submit them here!


Facebook Earnings Play

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Weeklies and the Options Market

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Over the past several years one of the biggest changes for the option trading market has been the addition of weeklies. Having an option series that expires every week as well as being able to buy those two, three, and four weeks from expiration has given traders more agility in adjusting their time frames for different option strategies. These options can be particularly useful around earnings release  times now enabling traders to actually just play the weekly for whenever earnings are released in a particular underlying. For the nondirectional trader, who puts on positions allowing for some movement in either direction, as long as it’s not too much they have also been a way to get quicker theta and have a position become profitable for you sooner. Obviously, you have much quicker time decay  with an option that is expiring in a week or two then an option that you may have sold it’s not expiring for 40 or 50 days. Still, there needs to be a balance between shorter-term option plays and longer-term option plays. For the trader who wants to put all of his trading capital into trading weekly options there’s a real risk because of the increased Gamma and Delta in the final week of training. Of course, this is balanced against the allure of quicker time decay, which is why many call weekly options the “crack cocaine” of option trading. As an option trader and a mentor over the last several years I have determined that there should be a balance between longer and shorter time frames. Personally, I like to have no more than one third of my trading capital dedicated for options trading in weeklies, and I like to have most of my nondirectional plays be in further out time frames: 30 to 40 to 50 days out and more. In fact, even option plays that are two weeks out can be much better dealt with when they move against you than one that is one week out. So for the nondirectional trader, having some that expire quicker and some that you have more time for can be very healthy for your trading account. New traders in particular should start out with longer time frames as they’re more forgiving of movement and then get into the shorter time frames as they become more proficient at option trading strategies. Just remember, quicker isn’t always better but it can be very useful in certain circumstances.

Mark Fenton
Senior Mentor- Sheridan Mentoring

Iron Condor Trade

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With the recent increase in volatility in the market, the iron condor is beginning to look to be a more attractive trade again. We recently have seen the VIX, or implied volatility of the SPX, go from being down around 12, up to 17 earlier today. The iron condor involves selling an out of the money call vertical and an out of the money put vertical, thereby bracketing the market in a wide area that you hope for the underlying to trade in. For instance, in the SPX, currently, you could sell the October 2005 calls and buy the October 2015 calls, and then you could also sell the 1890 puts in the October monthly and buy the 1880 puts. This would be for around a $3 credit. Then, as long as over the course of the next two weeks the SPX stays within the range of 2005 and 1890, you will be profitable. By selling the iron condor now you’re getting paid a little bit more than you would have even a couple of weeks ago for the same time to expiration, because the increase in volatility has caused an increase in the price of the shorts that you are selling. Always keep an eye on the downside, though, as the market is currently in a bit of a down trend. Be ready to buy protective long puts or even remove the put vertical if the market moves down substantially.

Mark Fenton
Senior Mentor

Would I Do Calendar Spreads with Volatility Rising?

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Yes, if they were Weeklys.

Looking at SPX, let’s consider buying one 1975 Put (Oct 24 expiration) and Selling 1 1975 put (Oct 10 expiration).

The long is around 24 days from expiration and the short is about 10 days from expiration. The cost or debit with SPX around 1975 is around $865 for 1 contract.

The trade is relatively neutral with SPX around $1975. The positive theta is $37 daily and the Vega is 71.

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The Calendar is positive theta because our short option is decaying quicker than the long option because it expires quicker.

Theta to Vega

The ratio of theta to Vega is approximately 2:1, this means if Implied Volatility decreases 1 point, the trade will lose approximately $75 from Vega. 2 Days of theta will make up for this.

Contrasting this with a farther out Calendar consisting of selling November and buying December, things are much different.

If I buy 1 December 1975 Put and sell 1 November 1975 Put, the debit is around $1200. The theta is 6 and the Vega is 71. The Theta /Vega ratio is around 12:1.

Implied Volatility

This means if Implied Volatility decreases 1 Point, the Vega tells us we will lose around $71. It would take about 12 quiet days for theta to make this back.

Conclusion: As Implied Volatility levels increase, I get concerned that they might drop. We currently were over 16 in VIX from the 10-11 level, not too long ago. If the market goes up and Volatility decreases over the next few days, being closer in with my duration on Calendars will make life much easier to bear!

-Dan Sheridan