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.
What Stocks Are the Best?
Often I am asked what stocks are the best for options trading? Whenever you begin to look for a stock to trade for options strategies you need to look for a stock that is relatively peaceful, perhaps in a trend or post earnings release.
The stock needs to have good option liquidity. 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. 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.
What to Avoid
Be careful to avoid stocks that are about to have a big product announcement, take over offers or earnings of course with your options trading unless you’re placing speculative strategies on that 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.
Some good stocks for options trading that I and my mentoring students regularly employ include GOOG, AAPL, NFLX and AMZN to name a few. The best stocks to use will be the higher-priced, 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.