Top 10 Stocks for Trading Options.
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 10 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.
FUTU Holdings Limited (FUTU)
FUTU has an impressive pedigree. Founder Leaf Li launched the company after learning all the tricks of the trade during his time as an employee of Chinese tech giant Tencent. In fact, Tencent is one of FUTU’s biggest financial backers, which demonstrates the faith its leaders have in their former team member.
FUTU is a holding company that specializes in financial products and services. Specifically, the company focuses on digital brokerage and wealth management tools, much like US-based Robinhood. FUTU held its IPO in March 2019, and almost immediately raised $90 million in capital.
FUTU’s US subsidiary, Moomoo, offers many of the same services. However, Moomoo’s customers make their home in the United States. Through Moomoo, investors have access to Hong Kong stocks, Chinese stocks, US stocks, ETFs, and options.
FUTU share prices have been unpredictable, and there is no end to the volatility in sight. That makes FUTU a smart choice for options traders in search of promising underlying assets.
Netflix ( NFLX)
Given the gains Netflix realized over the past year, it’s easy to assume share prices are on a steady upward trajectory. However, nothing could be further from the truth. In fact, the leading video streaming service experiences near-constant ups and downs.
That is due – in part – to the nature of the business. The entertainment industry is notorious for churning out rumors that prompt a sudden influx of trades. On top of that, Netflix is categorized and priced as a tech company – and the technology sector lives in an on-going state of flux.
Competition in the streaming space is heating up, and positive news from peers like Disney+ cause an immediate decrease in Netflix’s value. Then again, when the market catches wind of a popular Netflix original, an increase in subscription prices, or another bump in membership numbers, Netflix shares move in the opposite direction.
All of that volatility is good news for options traders – particularly now, as the company’s revenues are slowing post-COVID.
Upstart (UPST)
Upstart is disrupting the financial services industry, particularly as it relates to lending. The company developed a new method of measuring borrowers’ creditworthiness – one that considers dozens of factors beyond the standard credit score. Examples include which college an applicant attended, their GPA, and their employment history.
Upstart’s goal is to bring credit to previously underserved populations – those that lack strong credit reports but are still likely to pay their loans as agreed. Upstart boasts an approval rate that is 26 percent higher than traditional models, and their rates are 10 percent lower than average.
In addition to that, customers are particularly enthusiastic about the fact that funds are typically released within 24 hours of signing.
All of that means a company that is growing – but the trajectory isn’t straight up. This stock has bumps and dips that make it an intriguing choice for trading options.
Moderna (MRNA)
The past year has put Moderna in the headlines. It was one of the first biotechs to bring an effective COVID-19 vaccine to the table. Moderna is working with a new class of pharmaceuticals known as messenger RNA therapeutics. In addition to their effectiveness in protecting against the novel coronavirus, the company is deep into development of products that will prevent, treat, and cure the world’s most debilitating diseases.
COVID-related news, including competitors’ successes and failures, has turned Moderna stock prices into a roller coaster ride for shareholders. The release of trial data demonstrating the Moderna vaccine’s effectiveness pushed share prices up, but some of that progress was erased when other vaccine’s achieved approval for emergency use.
Investors interested in buying and selling options can’t go wrong with Moderna. If there is one thing that biotech analysts know, it is that these shares are highly volatile.
Mohawk Industries (MHK)
Flooring companies might not have the excitement and appeal of cutting-edge tech, advanced healthcare applications, and new, improved financial services, but Mohawk Industries shouldn’t be ignored. It is one of the most well-known flooring brands in its footprint, and it has a presence throughout North America, Australia, New Zealand, Europe, India, Mexico, and Russia.
The reason flooring is of interest to options traders is the cyclical nature of the industry. When economic news is good, residential and commercial properties get flooring upgrades. When times are tight, new flooring moves down the list of priorities. That sort of volatility increases options-related opportunities.
Apple (AAPL)
At first glance, Apple seems like an odd choice when considering the best stocks for trading options. After all, the $2.10 trillion company has no place to go but up – right? The fact is that Apple is likely to continue growing.
Its products are some of the most popular in the world, and the company is expanding into additional tech businesses that will bring more innovative tools and services.
Self-driving cars are on the docket, along with smart home technology. Apple is expanding its app store, improving its music platform, and encouraging the use of its proprietary arcade and television services. In other words, Apple knows it can’t live off the profits from iPhones and iPads forever, and it intends to be well ahead of the game when those revenues decline.
With all of that in mind, it’s often surprising to learn that Apple is more than twice as volatile as the market average.
Remember, at its core, Apple is a tech company. The entire industry experiences constant ups and downs depending on the larger economic and world events. Skilled options traders can profit from Apple’s volatility with carefully crafted options contracts.
Nvidia (NVDA)
The tech companies producing new and improved software get a lot of attention, but that doesn’t mean they are the only tech game in town. All of that software is useless if there aren’t any machines to run it. Nvidia makes those machines.
First and foremost, Nvidia creates some of the most advanced graphics processing units (GPUs) available. Gamers are particularly impressed by Nvidia’s advanced product line, and a range of professional industries choose Nvidia GPUs to optimize workflow . For example, architects, engineers, and construction workers rely on Nvidia hardware to get the job done. While GPUs aren’t Nvidia’s only claim to fame, they do have the strongest influence on Nvidia’s brand.
Nonetheless, as a tech company, Nvidia isn’t immune to volatility. Supply chain disruption, trade disputes, and general economic changes can all push stock prices up and down. That’s where options traders come in. That volatility means potential profits for those buying and selling options contracts.
Celsius Holdings (CELH)
Some products can be relied upon to sell regardless of economic conditions. Food and beverages rank fairly high on that list. Celsius Holdings is a beverage company that relies upon its unique formula to produce a collection of sparkling and still drinks.
Celsius beverages are marketed with energy drinks, but they aren’t really in the same category. The collection is intended to deliver health benefits, and it stays away from high fructose corn syrup, sodium, artificial colors, and artificial sweeteners.
Of course, there is some volatility in this sector, and Celsius has more than its share as measured against its competitors. That’s important for options investors, who have an opportunity to generate income from Celsius Holdings’ ups and downs.
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.
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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.