Home / Blog / Uncategorized : The Best Qualities of Options to Trade

trading options

If a stock, ETF, or currency, i.e. underlying has options available for trading, that doesn’t mean it’s a good idea to trade those options.  There are some equities with tradable option chains and some equities with untradeable option chains.  A trader should look for the following characteristics before picking an underlying to trade options. The reason why this matters is that a lack of liquidity can easily cost more than trading commissions. The following are the best qualities of options to trade:

#1 Penny Wide Bid/Ask Increments 

A Bid is the price at which an option can be sold and the Ask (or offer) is the price at which an option can be bought. The difference is referred to as the “Bid/Ask spread” which is an indication of what is commonly referred to as liquidity i.e., how easy is it to buy or sell an option.  Some options have minimum $0.05 increments between their bid/ask, while others will have only $0.01.  This started with the SEC’s “Penny Pilot Program” that began in 2007 with only 63 equities.  Now there are 363 equities with penny wide increments. The equities that are in the program are often the most liquid options available. Some of the most liquid underlyings trade with a bid/ask spread of just $0.01on their options.  These are the most liquid options to trade. For a list of these options, click here 

#2 Close Bid / Ask Spreads

If you want to trade a stock without a penny wide bid/ask, as a rule of thumb, you want the bid/ask spread to be no more than 5%, and ideally less than 2%.  The math for that is:  (Ask – Bid) / (Bid)

When you see a bid/ask spread of 10%, that means that each time you get in and out of trade you are giving up 10%.  So, if your goal is to make 10%, you need to actually see the trade go up by 20% to overcome the wide bid/ask spread.This is not only a reflection of how much you are giving up to open and close a position. Avoid wide Bid/Ask spreads.

#3 Narrow Option Strikes

When an option is highly traded, you will find that the market demands strike prices at more frequent increments.  You may notice that some equities have strikes at increments of $1; others have strikes at widths of $2.50, $5 or $10.  This is a function of the stock price and the options trading volume. In general, the more volume, the more strikes you have to choose from.  Having more strike prices makes it easier to pick the right trade and have the option likely be more responsive to price movement.

#4 Number of Expiration Periods Available

The number of expirations available on an option chain is a function of liquidity and market demand for options.  A good example is Apple (AAPL), which currently has 14 different expirations, including four weeklys.  Compare Apple to a stock like Fastenal (FAST), which only has 6 different monthly expirations.  The different expirations can be important when finding the right spread trade or when rolling i.e. moving an option to another expiration.

Conclusion 

These are not the only factors that are important when considering an underlying to trade.  You should still use candlestick charting techniques to find ideal setups.  But, if you consider these, you can save yourself some headaches and help keep the odds fair.

Learn more about combining Japanese candlestick charting techniques with options.

Copyright © Candlecharts.com |   Top


Risk Disclosure: The risk of loss trading securities, futures, forex, and options can be substantial and is not for every investor. Individuals must consider all relevant risk factors including their own personal financial situation before trading. An investor could potentially lose all or more than the initial investment. Risk capital is money that can be lost without jeopardizing ones’ financial security or life style. Only risk capital should be used for trading and only those with sufficient risk capital should consider trading. Past performance is not necessarily indicative of future results. We make no profitability nor performance claims of any kind; all information is published for educational use only. Disclaimer: All information provided herein is published for educational purposes only and should not be construed as investment advice. No profitability nor performance claims of any kind are being made. Trading is a high-risk, speculative activity. We are not an investment advisor, financial planner nor registered broker. We are a publisher of educational content. Consult with a registered investment advisor prior to making trading and/or investment decisions. By accessing this site and its products/services you agree to all terms of our Disclaimer . No offer to buy nor sell any instrument is being made on this site. You hereby grant this site a royalty-free, perpetual, worldwide license to display, modify, adapt, create derivative works from, and otherwise use any suggestions, ideas, comment posts and information that you provide to this site. None of our content on any site nor courses nor other publications is a promise or guarantee of specific results or future earnings; we do not offer any financial investment nor trading advice of any kind; we publish educational content. We do not purport to tell or suggest which securities nor currencies customers should buy or sell for themselves. Our owners, employees, subcontractors, colleagues and/or affiliates may hold positions in the stocks, currencies or industries discussed here. You understand and acknowledge that there is a very high degree of risk involved in trading. It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable or that they will not result in losses. Testimonials may not be representative of the experience of other clients, and testimonials are no guarantee of future performance nor success. Their experiences may not be typical of what you can expect to achieve, as results may vary. Claims contained within testimonials have not been verified. Testimonials, case studies and success stories are individual experiences by persons who have used our services. Although these are accepted from site visitors and customers in good faith, we have not independently examined the trading records of any customers and therefore have not verified any specific figures or results quoted therein. For this reason you should assume that their results are not typical. No representation is being made that any account will or is likely to achieve profits of any kind. Generally-expected customer results are that all traders lose money and do not become profitable, regardless of the training they receive -- trading is a high-risk speculative activity and there is significant risk of financial loss involved. Trading involves a substantial degree of risk and may not be suitable for all investors. Past performance is not necessarily indicative of future results. Commodity Futures Trading Commission (CFTC) Rule 4.41 HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS. The information, services, products, claims, and materials on our sites are provided “as is” and without warranties of any kind, either expressed or implied. We disclaim all warranties, expressed or implied, related to strategies and content provided on this site as well as those that are presented in our products and services. All courses, videos and services are licensed for individual noncommercial private use only and may not be resold nor redistributed in any manner. All sales are final and no refunds are offered. Every visitor to this site, and subscriber (or prospective subscriber or customer) acknowledges and accepts the limitations of the services provided, and agrees, as a condition precedent to his/her/its access to our sites, to release and hold harmless Candlecharts.com, Candlechartsacademy.com and Mycandlecharts.com, its officers, directors, owners, employees and agents from any and all liability of any kind (including but not limited to his/her viewing and/or implementation of this sites’ content, emails, webinars, videos, subscription to services and/or purchase of any trader training product or service herein). We encourage all traders to learn to trade in a simulated trading environment using a demo account only, where no risk may be incurred and to not risk live capital. TESTIMONIAL DISCLAIMER: Testimonials appearing on Candlecharts.com or any of our other web sites may not be representative of the experience of other clients or customers and is not a guarantee of future performance or success.