Let's Get Started Now! Get answers to your questions regarding transfer fees, commission rates, programs and available discounts related to online trading services. About Schaeffer's Research Legal Notices. Indicator of the Week: The Best Stocks for Option Traders. Stock and option trading are two very different things. Published on Jun 1, at 7: Updated on Jun 1, at 7: Here at Schaeffer's Investment Research, we specialize in option trading. Though an option contract's value is based off the stock price, a stock picker is not necessarily going to be a good options trader.
The main difference is that options have expiration dates. Therefore, an option trader not only has to be right on direction, but he has to get the move within a specified time frame. These features make option trading a completely different animal from stock trading.
Stocks are often compared by simply how much they return over a certain time period, but impressive stock returns do not necessarily correlate into great option trades. W over the past year. Both stocks have done very well with W outgaining STZ. But have these stocks been kind to short-term option players? That's what option traders like us want to know. So, let's consider a short-term option trader who typically holds a position for one month.
How did these stocks fare for him? To evaluate this, I assumed a trader could purchase a one-month option on the stock every single day. To find the prices of these hypothetical options you need an implied volatility. Furthermore, I assumed the trader held them the entire month and closed them out at intrinsic value when they expired.
The table below summarizes his results and many will find the results awfully surprising. Notice that even though W outpaced STZ during the time frame, buying calls on W would have resulted in a loss of 3. The percentage of positive trades is pretty revealing, as well. How did this happen? Why is STZ such a superior stock for buying options compared to W, which had a better stock return over the time frame considered?
There are two reasons that stand out. First, option traders have expiration dates. Notice how choppy the W returns are compared to STZ. Buying a call option during these times is a losing trade.
In contrast, the STZ chart has a much steadier uptrend over the past year. Second, the implied volatilities on W are much higher than STZ. To see just how important implied volatilities are for options traders, take a look at this example using current stock and option prices as of midday on Tuesday, May A stock move of 2. Therefore, this option actually lost 1. Do you see how big of a difference the returns are?
The dichotomy is due to the implied volatilities of the options. Below is a summary of the example. Does this mean STZ was a superior stock for option traders? What if a certain trader was extremely talented at perfectly timing the stock moves?
If a trader is that good at timing, then he may choose to play options on W because of the outsized gains he can achieve on those major moves. Notice in the table comparing the option returns, the second-to-last column shows the percentage of time the options would have doubled in value.
So, a trader especially good at timing big moves might be better at trading W than STZ. The last column shows the number of crap outs. Best Stocks for Option Traders: Using the same type of analysis above, there are many ways we can use the data to search for ideal option plays. It depends on what a trader is looking for. Some may look for stocks that have a lot of big winners. He might want to look at stocks with a high percent chance to double. Another trader may look for the best average call return.
In the tables below, I looked for stocks that gave the option trader the best chance at making a profit percent positive. It assumes you purchased one of these every single day over the past year, and it summarizes the results. The first table below shows which stocks gave an option trader the best chance at making a profit. Notice STZ, which we talked about already, is at the top of the table. Those were good stocks for buying call options. What about bearish put traders?
Returns on these poorly performing stocks are much more volatile, as indicated by their huge percentage to double and percentage that crapped out. Sign up now for a trial subscription of Schaeffer's Expiration Week Countdown! We'll send you 5 trades for expiration week, each targeting double- or triple-your-money gains in less than 5 days. Most Active Weekly Options.
Most Active Options Update. Indicator of the Week. Best and Worst Stocks. The SPX and Nasdaq suffered a third straight loss. The equity has a history of Santa Claus rallies. TOL shares bottomed near a key trendline. XHB is lower today on a negative earnings reaction for Toll Brothers stock. The results are better than words! Options trading made simple. Schaeffer's Investment Research, Inc.
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