There are so many optionable stocks on the market but it’s still difficult to choose the right one. As an option trader, you might be put in a fix when it comes to deciding the right underlying stock to trade because choosing the right one is very essential.
The reason for the difference between a successful option trader and a struggling one is this: The successful one dedicates time to trading option and at the same time focuses more on choosing the right underlying stocks to trade.
The struggling one, on the other hand, stops at just the trading option. Like the successful trader, doing both increases your chances of trading option successfully.
Also, for an option trader to remain successful he has to possess the ability to correctly foretell the price movement of a stock and also be able to correctly predict when the price movement will occur.
So the quality of being able to identify the right stock and foretell the price stock movement is what makes a successful option trader.
In light of this, some amount of research and analysis is needed if option traders want to know how to screen stocks and constantly find the right one for their option trading strategy.
As an option trader, how do you screen stocks for option trading? How do you determine the right underlying stock to trade? Check out the answers to these in subsequent sections.
Finding The Right Stocks
In a bid for option traders to find the right stock, there are certain things they should do, they include:
- Do some research
- Choose liquid stocks to invest in
- Look for medium to higher-priced stocks
- Consider trading reasonably volatile stocks
- Look at historical data and charts to identify trends
- Identify upcoming events that might impact stock prices
- Monitor Stocks actively discussed in forums, message boards etc.
- Utilize a good stock screener
Do Some Research
You cannot become a successful investor or trader if you don’t make time for research. If you don’t do research, how will you find the right stock to trade or invest in?
Do some deep research on the stock market, review previous stock data, review earnings reports, keep a keen eye on upcoming stock events and study how these events could affect stock prices.
Also, let your research extend into the management of the organizations you want to invest in. Monitor them closely, and check their websites and press releases regularly. Your research should cover the kind of product they produce and the kind of services they offer, also check out the countries where they carry out their operations.
Check their stock history both for a record of success and losses. From your research, you’ll be able to conclude whether you can invest in that company or not. The main point is that you don’t jump on any stock investment plan without doing prior research. Investing blindly will lead to more losses than profits.
Choose Liquid Stocks
When you’re looking for the right stock to use for your option trading strategy, you’re better off choosing from a liquid pool of stocks. Liquidity is your best option when trying to select the best stocks to use because it allows you to engage and disengage from trade as easily as possible.
When choosing from liquid stocks, choose the ones with higher volumes. Higher volume stocks are the most liquid stocks and the best to trade with.
Also, make sure to observe the average volume along the way because a high average volume shows that the trading volume of a stock is currently happening and not because of an upcoming event.
Thinly traded stocks cannot be easily predicted and are highly risky, so try to avoid trading with these as much as possible. To help you make better decisions, go back to reviewing historical data, chats and stock screeners; it’ll help you recognize average volume trends.
Look at Historical Data and Charts to Identify Trends
The importance of reviewing historical charts and data should not be overlooked. In these historical data, you could find information on the right underlying stocks to trade.
Although past results and performance do not guarantee that the same result will be replicated in the future, the information you find in it can help guide your decisions. So if you have the means or resources to check a company’s historical chart, then do so. In the process, you can find support and resistance levels that can help you figure out a company’s valuation and growth potential.
Choose Medium to Higher Priced Stocks With a wide Daily Range
Medium or high-priced stock usually has a good range of movement and this can have a positive effect on your option trading strategy. You should focus on trading reasonably volatile stocks that give you the chance to make your profits very easily, even daily.
This is very essential because if your stocks do not move fast, it’ll be difficult for you to get in and out of the trade. It may even be harder to cover your commissions and sustain a decent profit.
Be on the lookout for stocks that are a bit fickle with a higher average daily range, more than just a few dollars. To get this kind of stock, review the high-low ranges of the stock you have an interest in trading. Make sure that the range is wide enough and that it has a recurring pattern especially if you plan to continue trading the stock.
Monitor Implied Volatility
Volatile option trading strategies are well known for their ability to always return a profit. It doesn’t matter if the underlying stock goes up or down, a volatile option will return profits as long as the move is significant.
Implied volatility is one of the most essential factors in knowing an option price so it’s important to pay more attention to a stock’s volatility when you’re trading option.
The purpose of implied volatility is to inform you whether there’s going to be a stock move or not. Higher volatility comes with higher premiums which cause writing a call to be more attractive if the volatility does not continue to increase to the extent where the option will be exercised.
Also, traders should place a stock’s historical volatility with its implied volatility side by side so that they can get a better knowledge of what to expect. More importantly, you should always be on the watch for any change in events that could affect the implied volatility of a stock and consequently affect the stock price.
Identify Upcoming Events that Might Impact Stock Prices
Option traders should always monitor stock-specific events. Events like economic data releases, federal reserve announcements, election results, economic data releases, earnings reports and product launches can affect stock prices.
Monitoring these events helps you predict when a price movement will occur in stock, with that knowledge, you’ll know when to start your investment.
These events even before they occur can have an impact on implied volatility which consequently affects stock Price when it finally occurs.
Being able to quickly identify these events will help an option trader make their decision on the time frame for their option trade.
To take advantage of any rise in volatility before an event starts, you need to be ready and updated about any upcoming events that can affect a position. You can achieve this by keeping a close eye on a company’s website where you can be updated about press releases, planned events and company news.
Determine Your Investment/Trading Objective
Option traders must be sure about what their investment or trading goals are. This helps traders to have a clear definition of what their objectives are which guides them in choosing investment plans that help them achieve these goals.
Utilize Stock Screeners
Stock screeners are very essential tools that option traders can use to filter stocks based on some prior metrics which helps them quickly select the best stocks.
For instance, users can screen for stocks based on their price, price range, price triggers, volatility, market cap, average volume and much more.
Option traders can use screeners to check historical data, and past earning results to find stocks that have the potential to perform better in the future.
There are different platforms where you can screen stocks but you can try the Pocket Option platform. Here you have access to DEMO accounts where you can try option trading without using your own money.
Using screening tools is very important if you want to avoid risk. It helps you avoid risk and find the best stocks for your option trading. With a good stock screener, option traders can analyse over a hundred stocks within a set time, allowing them to discard the stocks that don’t meet the requirements.
On a final note;
The steps above are tips to help option traders screen stocks and choose the best underlying stocks for their option trading strategy.
Before starting option trading, traders should first conduct their research, use more liquid stocks and follow all the steps mentioned above for a better and successful trade.