The options market is already a high-risk trading zone, where you can earn as well as lose money with a high rate of returns and that is the minimum span of time. Mostly traders do option trading in the main index or sector or market cap-based active indices. In stocks usually, the trading volume is low, which makes it difficult to make more choices in options trading.

You can find widespread strike prices in the Nifty option chain, but in stocks there are limitations. In future and options already only limited stocks are allowed to trade, hence it would be difficult to find the best stocks for option trading. But you can easily filter the right stocks that are suitable for option trading if you follow the listed criteria below.

Best Stocks for Options Trading Means

In option trading, you buy the call or put or trade with the combination of both types of contracts in your trading strategy to maximize the profits and minimize the losses. Hence, the best stock means it should have enough trading volume and move as per the market trend.

Also Read: Importance of Volume in Technical Analysis: Use & Role in Trading

Apart from that there should be various strike prices so that you can choose the right one as per your risk-bearing capability and budget. The most important thing is that there should be enough volume of trade to easily buy or sell the option any time before the expiry.

Points to Consider While Picking Stocks for Option Trading:

1. Volume of Trade

As we told you except main indices, there is a low volume of trades in most of the stocks or other index trading in the option market. Just like intraday trading or short-term trading, volume is one of the most important factors that need to be considered while looking for stocks in option trading. Low volume of trade is any stock option is not suitable from any angle.

So, check the daily average volume in the stock option you are looking to take a position. Low trading volume will not only make you difficult to enter and exit from such trade positions but also can be also risky if you are unable to square off your position before expiry.

Also Read: How to Add, Read & Use Best Volume Indicator in TradingView

2. Liquidity in Strike Prices

Similarly, just like volume you also need to check the level of liquidity in the various strike prices of a stock option. Mostly the strike prices closer to the spot price have sufficient liquidity and the strike price too far away from the current market price will have negligible liquidity.

To find out the liquidity level in a stock option you can check the number of contracts traded in a particular call or put strike price. The liquidity in the stock option also very much depends on the expiry date of the contract, time value and decay, hence make sure the stock you choose has enough liquidity to trade so that your trading strategy can work.

3. Analyses the Open Interest

Open interest is one of the most important factors that you should always consider while taking positions in any type of option contract. Nifty open interest is the number of contracts open in Nifty index option of particular strike price for a particular expiry month. A stock option with the highest number of open interest in its contracts is best for option trading.

Also Read: How to Use Open Interest for Intraday Trading or Trading

Just like the strike price, the near-month strike price closer to the spot price has the highest level of open interest. However, with the change in the market trend sentiments of the traders towards the particular stock keep changing as per the increase or decrease in price change.

4. Evaluate the Volatility Factors

Volatility (VIX)is one of the most important factors in options trading and intraday trading or short-term trading. Volatility is the magnitude or frequency of fluctuation in the price of an underlying security. In option the high volatility means there is high potential to give the returns but high volatility means it also increases the risk level.

Also Read: How to Trade in High Volatile Market: Best Trading Strategies

In stock options, you can check the implied volatility and level of volatility that will tell you how much the stock can move or not. High implied volatility also makes the option price (premium) making option selling more attractive. While the low implied volatility means the option premium is also cheaper, that is good for buying the options.

5. Consider the Time Horizon

Time horizon is another one of the most important factors in option trading. For every option contract, there is a pre-defined expiry date like weekly, monthly or quarterly. The closer the expiry date of the stock option contract, the premium will be also low, while the expiry is far away having high premiums that can cost your trading strategy.

And based on the time horizon you can define you can choose the right stock and formulate a suitable trading strategy. A long-term option contract offers a longer time to trade but will cost you more due to time value. Hence, pick the right stock option as per your trading strategy that is aligned with the suitable time horizon for you.

6. Calculate theIntrinsic Value

Intrinsic value is the difference between the strike price and the spot price of an underlying security. The premium price of an option is determined on the basis of this intrinsic value and time value. If the intrinsic value of a stock option positive means, it is in-the-money and if it is negative, means the option is out-of-the-money and if it is zero, then it is at-the-money.

Also Read: Best Option Strategies for Sideways or Range Bound Market

Traders analyse the intrinsic value to decide the potential of profitability and risk in the option contract. You need to consider this seriously, as in option trading intrinsic value is the real value of an option contract if it is exercised before the day of expiry.

7. Consider the Time Value

Time value in option trading is another important factor you need to consider while picking the right stock. Time value that is also known as extrinsic value in option contracts refers to an extra amount you pay over the intrinsic value of an option contract.

And with the time being as soon as the date of expiry arrives, the time value of an option starts gradually falling, that is called time decay. And this time decay happens as near the expiry day, there is not enough time and chances to increase the value of the option premium.

Time value matters as the time decay is not good for the option buyers as it reduces their profitability or brings losses. On the other hand, the time decay is beneficial for the option sellers as it reduces the option premium price near the expiry.

9. Define Your Trading Objective

While choosing the option stock you need to define your objectives, if you already have any stock in your portfolio and don't want to sell and take advantage of profit from its falling price, then you can choose the same stock in option trading. This is also called hedging, which offsets the potential loss that you might incur from the falling price of the stock.

Also Read: Best Option Strategy for Bearish Market: 7 Option Strategies

Apart from hedging, traders also choose stock options for trading, which means they want to earn money from the speculation. Though option trading without hedging is more risky, but if you trade with the right strategy, you can gain profitability. Hence, before you choose the stock for option trading define your investment and trading goals.

9. Gauge Your Risk Appetite

Option market is one of the riskiest segments in the financial market. Despite trading with a feasible trading strategy, traders lose money in option trading. Hence before you enter into any trade position, define your risk appetite how much risk you take or how much money you are ready to lose or loss you can endure if strategy not work or the market moves abruptly.

If you are high risk trader you can go for the high-risk trading strategy like choosing the high volatile stock options or picking high-cost premium strike prices. However, if you are low-risk trader, trade with the low-risk trading strategy reducing your exposure to high-risk trades. You can pick the low volatile stocks and trade with stop loss to minimize your risk.

10. Use the Right Option Spread

Before entering into any option trading strategy whether it is index option or stock option, always use or create the option spread of your strategy, so that you can see the potential gains, losses and breakeven points of your trading strategy. It shows the entire summary of the trading strategy through a graphical representation that is called option spread.

It will also help you to easily understand the potential and range of maximum profits and losses when the price of the underlying security moves in either direction. When you choose to trade in with multiple option contracts like buy and put in the same underlying security with different strike prices, then it can show the entire overview of the strategy.

Summing-up

Just like trading in other segments in the market, liquidity or volume and risk factors are the one of the most common points you need to consider itsintraday trading, short-term trading or trading in the option market. But while finding the stocks for option trading you have to consider some other factors like intrinsic value, time value, time horizon and volatility of the underlying security.

All these factors can affect your trading strategy, hence picking the right one having a significant volume of trade and being within your budget and risk zone is important to make your stock option strategy successful. It should meet your trading objective and also have the potential to give the maximum returns in the shortest span of time at the lowest risk.

Apart from that while picking the best stock for option trading, also use the technical indicators to analyse the stock price movement and trend. The technical analysis will help you to find the best one that has the potential to give your returns, as per the trend. The best part of using technical chart like candlestick chart patterns and other useful technical indicators is that you will get to know the buying and selling levels of the stocks in the option too.

Also Read: How to Read, Analyse& Use Candlestick Chart Patterns for Trading

Here, you can get help from the market experts at Moneysukh, who will help you in choosing the best stocks for option trading. Moreover, you will also get tips and recommendations for option strategies as per the market conditions. You can also choose the Algo trading to trade in options with the best intraday algo trading strategy at the lowest brokerage.

To enjoy all these benefits and perks offered by Moneysukh, you have to open demat and trading account here at one of the best discount brokers in India. You will also get the facility to trade with a best online trading platform with the best features demat account with free accessibility to research reports and useful articles on stock market trading.