Finding the best stocks for options trading in 2018
I am regularly asked about how to find the best stocks for options trading and in 2018. The process below is for finding a suitable list of stock to have on my core list which Ive been using for many years.
You need your own core list or universe of stocks because looking at every stock in the known universe is stoopid and I certainly have got time to scan 12,000+ stocks without having some really critical filtering
Lets also agree that you do not need to look at every stock as some just are not worth the time or effort.
Thankfully there are many software tools and online tools both free and paid that will help you create a suitable universe of stocks for you to draw from in your day to day trading.
How to find the best stocks for options trading in 2018
This short check list is something that I run through once or twice per year to ensure I have a liquid pool of stocks that have potential to move and do interesting things with which to draw my daily stock selections from.
1 – Liquid stock.
I want to see a stock that has and average of 1 million shares traded per day. (anything longer than 60-90 days average)
Using a 1 million average plus all the other steps I end up with around 400 stocks.
Once the other steps have been done the list of stocks can be further refined by increasing the number of shares traded. Doing this will make your universe of stocks smaller and more liquid.
2 – Stock price >$30.00
I like to cut out a lot of lower priced stocks and while there is often nothing wrong with lower priced stocks or indeed penny stocks, I am looking for a good range of movement from the stock which can have an impact on the option I would be using to trade the underlying with.
My own experience with the lower dollar stocks is that while they do move and you can profit, the option by comparison just doesnt see the same oomph.
A $2 move on a $10 stock is a big 20% move. Yet, I can find a $2 move on a $50 stock, which is a 2% move relative to the stocks price, every single day.
3 – Optionable
This is the most obvious thing you can look for when you are filtering the best stocks for options trading.
Doing this step to create your universe of tradable stocks will save you from being frustrated at not being able to trade a likely looking set up later on simply because it has not options on the stock.
Further filtering by weekly options can be done here. A simple google of the best stocks for weekly stock options will bring up sites like this @ CBOE
4 – ATR >$1.00
Adding this filter using the average true range indicator (ATR) either the default 14 period setting or a longer and smoothed 100 period setting will trim off the stocks that do not really move intraday much.
I like the longer 100 period ATR setting myself which gives me a nice list of stocks that have a tendency to move and oscillate on a day to day basis.
5 – Option volume $1,000/pm
This filter I had to learn the hard way. I want to be able to get in and out of positions that I like the look of. But if the stocks options are like a ghost town this can be more difficult to get filled or just get a good price quoted.
The other steps will often bring in a good list of stocks and this step is an essential double check to ensure that I have the best stocks for options trading in my universe of stocks.
6 – Stock Bid/Ask – ideally less than $0.05 (subjective. Evaluate)
This is a nice little tool I have on my radar screen which allows me to see the difference between a stocks bid/ask.
Typically, the tighter the bid/ask spread then the more efficient a market place there is for that stock.
This should also translate to the stocks options too.
I place this as a subjective rating tool as some stocks have wide bid/ask spreads which jump around a lot. Chipotle (CMG) for example has a wide bid/ask spread but the stocks options (the way I trade them) are just fine.
I use this filter to see what monster spreads that their may be with stocks I am perhaps not so familiar with and usually a quick visual inspection of the chart will highlight how much of a pigs ear it looks.
Side bar – A pigs ear is a technical phrase I use for charts with lots of candles with small bodies and big spike. I want my charts to look similar to those ones you see in text books. More on that later.
7 – Household name (subjective & optional)
This is most definitely optional but it is also a good one to follow. It might be that you are familiar with some stocks already but might be below the $30.00 threshold.
There are some ETF’s and common stocks which this would normally exclude but if you use a little common sense it is certainly OK to add a few popular stocks in because they are popular or a household name as a product.
The Oils ETF symbol USO is one example as is the stock Pandora symbol P. Both are popular and well known. They move like gangbusters when they get going and, as I type this, are currently under $10.00 per share.
This rule allows for a little common sense as well as letting a few known favourites onto my stock universe.
So there you have it, my criteria for finding the best stocks for options trading in 2017, 2018 and beyond.
What to do next after you have a universe of the best stocks for options trading?
What I do with this list is use this as my core universe of stocks. I no longer need to trawl through every possible stock that is available to trade. Neither do I need to check if it is worth trading. All this has been done in advance.
This list of stocks is what I will scan on a daily basis to draw my trades from.
I have discussed how I scan for stocks in detail here – How to find the best stocks to trade today, every day on demand
My personal preference is to filter for predetermined charting set ups from my universe of what I consider the very best liquid stocks.