Options trading can be a thrilling, yet complex, frontier in the investing world. It’s an area where fortunes are made and lost, often in the span of a single trading session.
While options trading isn’t for everyone, if you’ve got the stomach and strategy for it, the financial instruments can offer high rewards. But before diving into the options pool, what you need to know is where to swim.
What Makes a Stock Good for Trading Options?
When it comes to trading options, stocks that offer high liquidity, volatility, and a robust market are prime candidates.
Stocks with significant trading volumes and open interest make entering and exiting positions a breeze. It’s also crucial to look for stocks that have a diverse range of strike prices and expiration dates, giving you ample flexibility in strategy execution.
But first, if you are new to options, here’s a quick primer.
Options are contracts that give the contract owner the right to buy or sell a specific asset at a predetermined price (the strike price) within a certain timeframe (the expiration date).
The individual holding the contract doesn’t have to buy or sell the underlying asset. It is common to let options expire with no action, generally because exercising the options at the strike price would not benefit the investor holding the option.
Investors who write and sell options contracts are betting that the underlying stock price won’t move past the strike price. They generate income from the premiums they charge when selling the contract.
Those purchasing options are more likely to realize gains when the underlying asset is volatile. Changes in the underlying asset’s value offer opportunities to sell or exercise the options profitably.
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 13 Stocks With Most Active Options
New investors tend to focus on buying and selling stocks. These types of trades are straightforward and easy to understand. However, there are distinct advantages to buying and selling options. As investors gain experience, many begin to explore options-related opportunities.
However, options trading requires very different strategies as compared to buying and selling stocks. The stocks that make sense for adding strength, stability, or growth potential to your portfolio aren’t necessarily the best stocks for trading options.
These companies are often listed as the best stocks for trading options, because they are just unpredictable enough to create some suspense without being so volatile that the risks far outweigh potential rewards.
When it comes to liquidity and a robust options market, Apple ticks all the boxes. With millions of shares changing hands daily, you’ll never have trouble finding a buyer or a seller.
The high volatility seen in the tech giant, especially during product launches and earnings seasons, can lead to substantial option premiums.
For traders who know how to navigate Apple’s cyclical nature and event-driven price moves, options can be a gold mine.
The other benefit of trading Apple options is the stock’s predictability to some extent. Apple has its seasonality; new iPhones typically come out in September, and the holiday quarter tends to bump revenues. Using these known variables, a trader can make calculated bets, either to ride the momentum or to hedge.
Much like Apple, Microsoft provides a liquid market for options trading. As one of the leading tech stocks, Microsoft’s options come with both weekly and monthly expiration, giving traders plenty of choices. It’s a darling for both retail and institutional traders, making liquidity the least of your concerns.
Microsoft has been riding the cloud-computing wave, and it’s doing so in style. Azure, its cloud service, often impacts the stock more than any other segment. Any news or earnings results around Azure could cause the stock to swing significantly in either direction, providing fertile ground for options plays.
Tesla is essentially the poster child for volatility, which is like catnip for options traders. With frequent news updates from its enigmatic CEO, Elon Musk, and the inherently volatile nature of the EV market, Tesla options are a playground for those who know how to manage risk and seize opportunities.
What’s more, Tesla’s options market is as robust as they come. The stock often sees massive swings in a single day, which, while risky, can provide the kind of instant gratification (or heartbreak) that options traders thrive on.
And with frequent developments in the EV industry and Tesla’s other ventures, there’s often a catalyst to trade around.
If you’re an options trader with a particular interest in the tech sector, Nvidia is a stock you can’t ignore. Known for its Graphics Processing Units (GPUs), Nvidia is deeply involved in everything from gaming to artificial intelligence. This diversity makes for a volatile stock, and where there’s share price turbulence, there’s an options strategy to employ.
Nvidia’s options are liquid and come in a variety of strike prices and expiration dates. With the company making waves in the tech industry, whether it’s a new product launch or a blockbuster earnings report, the stock offers plenty of trading catalysts.
Traders can consider putting on straddles, strangles, or even more complex options strategies to capitalize on Nvidia’s often unpredictable moves.
Netflix may have started as a DVD rental service, but today it’s a streaming behemoth and a prime candidate for options trading.
Netflix is particularly volatile around earnings season, given the company’s intense focus on subscriber growth numbers. These numbers can send the stock skyrocketing or plunging, making it a high-stakes, high-reward scenario for options traders.
The stock also has high liquidity, and its options come with a broad range of strike prices. It’s worth noting that Netflix tends to react strongly to market trends and consumer preferences.
With more players entering the streaming space, big news that impacts the competitive landscape can create lucrative opportunities for options plays.
Alphabet, the titan behind Google, offers traders high liquidity and a constantly evolving business model that brings in enough volatility for options plays.
Whether it’s updates about its advertising business, cloud computing, or AI capabilities, GOOGL has enough catalysts to keep traders interested.
Its options market is vast, with multiple expiration dates and an array of strike prices. Given Alphabet’s involvement in various sectors, it offers diversified exposure for traders.
META (Facebook’s Parent, formerly FB)
In the recent past, Facebook decided to rebrand itself as META, focusing more on the ‘metaverse.’ This strategic shift has not only brought volatility to the stock but also opened new avenues for options traders.
META has been at the center of numerous debates and news cycles, adding more catalysts to an already volatile equation.
Options for META are highly liquid, partly because of the company’s enormous market cap and partly because of its constant news flow. From updates on the metaverse to issues around data privacy, META options offer a way to ride the volatility waves.
HubSpot, a leader in inbound marketing, sales, and customer service software, might not be as well-known as Apple or Microsoft, but it’s a gem for options traders.
HUBS has shown consistent growth and volatility, especially around its quarterly earnings. This often results in a dramatic price action that can be very beneficial for an options trader.
When it comes to liquidity, HUBS options aren’t as liquid as some of the other big names, but they’re liquid enough to not cause concern. You’ll find a good range of strike prices and expiration dates, thereby providing plenty of room to maneuver through various options strategies.
Salesforce, a cloud-based software company, also fields a liquid options market. The stock has historically shown significant volatility, especially around acquisitions or major product announcements, providing options traders ample opportunities to capitalize on big moves.
Salesforce is another stock where you will discover a wide variety of strike prices and expiration dates. Whether you’re trading earnings or betting on a sudden market move, Salesforce is an excellent candidate for trading options.
VISA (V) and MA (Mastercard)
Both Visa and Mastercard are payment processing giants that show lower volatility compared to tech stocks but offer steady and predictable patterns that can be just as lucrative when traded correctly.
They also offer a plethora of options contracts, giving traders plenty of choices for crafting their strategies. Significant shifts in consumer spending trends or regulatory news can lead to profitable options opportunities.
SPY, QQQ, IWM
These ETFs have extremely liquid options markets and offer a variety of strategies whether you’re bullish, bearish, or neutral on the market as a whole.
What factors make a stock good for trading options?
High liquidity, volatility, and an extensive market are key. A diverse range of strike prices and expiration dates is also essential for flexibility.
Can I trade options on ETFs like SPY, QQQ, and IWM?
Absolutely. These ETFs are among the most liquid and provide an excellent opportunity for options trading.
How important is liquidity in options trading?
Liquidity is crucial in options trading because it allows for easier entries and exits, reducing the cost of trading through narrower bid-ask spreads.
Do all stocks offer the ability to trade options?
No, not all stocks have options available. Typically, stocks with higher liquidity and larger market capitalizations have more extensive options markets.
Is high volatility always good for options trading?
High volatility is not necessary for options trading but it can increase potential returns. The flipside is it can also amplify risk. A balanced approach that factors in your risk tolerance is essential.
Best Stocks For Trading Options: The Bottom Line
These stocks are a good starting point for options traders in search of just the right level of volatility. However, this list is by no means exhaustive. As you seek out alternative stocks, consider the nature of the business, historical volatility, and market conditions that are likely to impact future ups and downs in share prices.
While high volatility can provoke anxiety among those who rely on share gains to deliver portfolio returns, it has the opposite effect for options traders. Volatility creates the conditions in which those who buy and sell options can turn impressive profits.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.