Often 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.
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
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