Finding the right stock for Option Trading

Finding new trading ideas in the FUTURE AND OPTION is hard work. Options can be used to implement a wide array of trading strategies, ranging from simple buy and sells to complex spreads with names like butterflies and condors.

In addition, options are available on a vast range of stocks, currencies, commodities, exchange-traded funds, and futures contracts. There are often dozens of strike prices and expiration dates available for each asset, which can pose a challenge to the option novice because the plethora of choices available makes it sometimes difficult to identify a suitable future and its option to trade. Here is a list of five simple and helpful tips to help you identify future and options trading opportunities.

I’m constantly looking for the “low-hanging fruit” when it comes to stock and options trading. I don’t want the trades that I have to overanalyze and look at 100+ times over to confirm something. There are hundreds of securities to trading, and we want the easy trades right?

The normal distribution curve of gains

But I know how hard it can be to dig for new ideas, so here are 5 tips to help you get started. As always, it’s best to have some sort of system in place to keep you accountable.

Digging for New Stock and Options Trading Ideas

  1. Choose High Volume Stocks

  2. What Stands Out?

  3. Momentum Indicators

  4. Fundamental Analysis

  5. Set Up Price Alerts

1. Choose High Volume Stocks

Quit the penny stock stuff – it doesn’t work long term, and it is not consistent. Take that long list of stocks you look at each day and narrow it down to 20-40 stocks that have a lot of trading volume and liquidity. If there is the light volume on the stock then there is bound to be light volume on the options.

Source - NSE

I prefer the indexes and the major stocks of the index.

2. What Stands Out?

Below are two things in charts, range and trend. Which one stands out more to you?

Stock with minimal movement (range) Identify those stocks and apply gamma short strategies to earn time value. The first chart is a stock that isn’t moving and likely has minimal options activity.

Stock with a lot of upward movement (trend) Identify those stocks and apply gamma long strategies to earn out of the big movement. The huge move in the stock screams' opportunity. Depending on your analysis this could be a great trade for multiple reasons

Again, look for the low-hanging fruit. What jumps out of the screen and begs you to analyze it more? This can help really narrow your trading down.

3. Momentum Indicators

Stochastics, MACD, Volume, Moving Averages, and RSI all play a key role when deciding on a new trade. The basket of indicators you choose, whether lagging or leading, may depend on where you get your education. Try to keep it simple when first starting out; using too many indicators, in the beginning, is a ticket to the land of big losses.

Chart overlay with overbought and oversold levels. Get very comfortable using one or two indicators first, and then add more indicators slowly.

RSI Momentum Indicator

4. Fundamental Analysis

Yes, I said to do some “basic” fundamental analysis.

  • Where is the company going?

  • What news has come out that could affect it?

  • Are earnings coming up soon? What about the industry or sector?

There are so many questions to ask, but the main idea here is just to get a general idea of what’s going on outside the charts. If you are trying to buy calls on a stock that just announced a major layoff or poor earnings then you are in for some big losses.

Fundamental Analysis

Sometimes a little homework now can save you thousands over time.

5. Set Up Price Alerts

One of the most underutilized services of most brokerage platforms is price alerts. Why wait around for a stock to get down to 5 % or whatever when you can have an alert sent out.

High probability trading is what I try to find because they are the trading setups that are “most likely” to make you money. Again, I didn’t say 100% or anything close to that. Trading for a living is about winning on a consistent basis. As per my knowledge options trading can be complex, especially since several options can exist on the same underlying, with multiple strikes and expiration dates to choose from. Finding the right stock/option to fit your trading strategy is therefore essential to maximize success in the market. There are five-six basic steps to evaluate and identify the right stock option, beginning with an investment objective and culminating with a trade. Define your objective, evaluate the risk/reward, consider volatility, anticipate events, plan a strategy, and define options parameters.

However, I’m sharing with you all a very simple and effective way to shortlist stocks for options trading. I tried to explain it in the easiest of manner so that it is understood by all even if they are not from a trading background.

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