Trading options instead of stocks can be a smart choice if you prefer to take an active, tactical role and you want to have flexibility in your investments.
Successful options trading requires you to have a talent for prediction, not to mention nerves of steel. When buying an option, you’ll need to forecast whether the stock price will rise or fall, how much it will change, and what time frame it will change within.
However, not all options are created equal. For most situations, it’s better to trade options that are highly liquid and active. You can also take the other side of the trade and sell options to boost the odds in your favor.
Why Should You Trade Stocks With Active Options?
With all else being equal, it’s better to trade options that are highly active. If an option doesn’t have enough trading volume, then the bid-ask spread will be greater. This creates an unpleasant effect known as slippage, in which a trade is executed at a price different than what you intended.
As a result, you could end up being charged 5 to 15% more than you expected. That’s a high price to pay for trading in illiquid options, and all this lost overhead adds up over time.
Ideally, you should look for options that have as little bid-ask spread as possible, in order to maximize your chances of making a profit once the trade is complete.
Top 10 Stocks With Most Active Options
Computer processor manufacturer AMD [NASDAQ: AMD] has been having an excellent 2019 so far, with shares up more than 40% since the start of the year.
Most recently, the stock took a big leap after Google confirmed that it would partner with AMD for its new video game service Stadia.
Demand for AMD products, particularly the company’s Radeon series of GPUs, is likely to remain strong in the near future.
Apple [NASDAQ: AAPL] stock is also up since January 1st, but it has fallen since its record highs in October last year.
Shares plunged in November after worries about iPhone sales trends, and then again at the start of the year when CEO Tim Cook warned of cooling sales in the Chinese market.
Still, Apple’s services business–from the App Store to iCloud and Apple Pay–is projected to expand rapidly in the next few years.
3. Bank of America
Bank of America [NYSE: BAC] stock is interesting for options traders because shares have historically been volatile in the short term, yet fairly stable in the long term.
Short-term prospects look good, with the most recent earnings report outdoing expectations. What’s more, the company stock is still cheaper than rivals such as Wells Fargo [NYSE: WFC] and JPMorgan Chase [NYSE: JPM].
Facebook [NASDAQ: FB] has been having a rough time in the public eye lately, with a series of privacy scandals damaging its reputation.
The stock is now down 27% from its all-time high in July last year. Nevertheless, the company continues to grow in both users and revenue, although the figures are beginning to plateau in the U.S. and Europe.
Another computer chip manufacturer, Micron’s [NASDAQ: MU] latest financial report was a mixed bag.
The company announced that its quarterly earnings beat estimates, but also said that it would cut its production numbers due to reduced demand for its products.
Shares are down significantly since a peak in summer 2018.
Disney [NYSE: DIS] has been making some interesting moves lately, including closing its $71 billion acquisition of 21st Century Fox.
The merger will likely bring growing pains and layoffs, and shares fell by 3% immediately after the announcement.
Disney hopes that the deal will help it expand its content library for its upcoming “Netflix killer” streaming video service, Disney+.
Many investors are worried that Netflix stock [NASDAQ: NFLX] is overpriced, especially given competition from Hulu and Disney+.
Its price-to-earnings ratio is a sky-high 140, compared with the S&P 500 average of 21.
What’s more, Apple is expected to announce its own video streaming service in March, making the market even more crowded.
Amazon [NASDAQ: AMZN] remains a dominant player in the U.S. retail market, and it’s diversifying into other arenas such as Whole Foods and Amazon Web Services.
To the company’s credit, it’s never afraid to expand into new verticals and horizontals, which means prospects for growth are strong.
However, the stock’s P/E ratio of 89 is fairly high, even among its high-powered technology peers.
The third computer chip manufacturer on this list, Nvidia [NASDAQ: NVDA] has seen its stock plunge since reaching new heights in summer of last year.
The looming specter of tariffs also casts a shadow over the fate of Nvidia and its competitors. Despite being called one of 2018’s “biggest losers,” however, Nvidia shares recently rallied to their highest point since November after announcing a slew of new partnerships.
While the 737 MAX makes up a sizable portion of Boeing’s revenue, many options traders believe that the model is “too big to fail,” and are banking on a swift rebound for Boeing stock.