How to Select the Best Stocks for Options Trading?

Select the Best Stocks for Options Trading: The most important thing in option trading is your stock selection criteria. Once you learn to do stock selections, things become easy for you and you can earn a decent profit in the future. 

If you do option trading then the biggest problem in option trading is that on which stock to do option trading because there are 180+ stocks listed in option trading, so it’s very difficult to select the stocks. 

But today in this article I will tell you how even as a beginner you can do stock selection for options trading.

Best Stocks for Options Trading 

One thing you have to understand is that whenever you are trading a stock, it becomes very important that you narrow down your stock selection.

Because many times it happens that we unnecessarily choose such stocks which do not have volatility in them. There is neither any volume nor any news in which we get trapped.

So to limit your stock selection, if you are an experienced trader then take stocks from Nifty 500 and if you are less experienced or a beginner then you can take stocks from Nifty 50. 

Keep one thing in mind, those stocks that have the highest beta (basically, in contrast to the index how fast it goes up or down) will rise more quickly and will also fall more quickly. 

How to Select the Best Stocks for Options Trading?

Timing

If you want to select stocks for option trading then you don’t have to select the stock directly. The most crucial thing in stock selection is to look at two things, the most important is timing because if you have bought a stock and that stock has already given a good movement, then no matter how good the stock is, yes you may lose there.

Because there is something daily in the stock market, there are such stocks in which you get to see a big movement and in such a situation, if the stock has already given a big movement that means the price of the stock has already increased and you have made a late entry, then it later there may be chances that the price may fall down and you may incur a loss.

That’s why timing is the most important thing in trading, so you must focus on timing while trading and after this you also have to pay attention to the market sentiments. If you are trading, market sentiments matter a lot and do not trade against market sentiment.

If the market sentiment is positive then you only have to buy there and if the market sentiment is negative then you only have to sell there. [Select the Best Stocks for Options Trading]

Read Also: Best Time Frames for Option Trading in 2024

High Liquidity

Before selecting any stock, you have to pay attention to the liquidity factor of the stock, choose such stocks which have high liquidity. This means the stock on which you want to do options trading can be easily sold because there are stocks in the stock market which you can’t buy and sell easily because not many people want to sell that stock or many people do not want to buy it.

That’s why you have to avoid these types of stocks for options trading because if you buy a stock and can’t sell it, you may face problems, so you always have to select high-liquidity stocks for options trading. 

You will get to see liquidity in those stocks, which are popular stocks and also in the large-cap stocks i.e. the big companies, many buyers and sellers are available all the time in those companies. 

High Volatility 

Whenever you select stocks for option trading then there you have to see in a stock is high volatility. Volatility means that the stock you have bought there has chance of movement in that stock.

Because if there is no such movement in that stock then you can’t make profit from that stock. That means it’s very important for that stock to be volatile. 

So if there is a stock in which you don’t get to see any special movements daily, then that stock is not good for options trading. [Select the Best Stocks for Options Trading]

Intrinsic Value

In options trading, intrinsic value means that if an underlying asset expires today, the amount of premium that gets settled on its option is called intrinsic value. 

The intrinsic value of an option is its real value or the real value of the option premium. Intrinsic value is different at the money and the strike price is different. In call and put option there is no intrinsic value for ATM (At The Money) and OTM (Out The Money) but ITM (In The Money) has intrinsic value. 

When you buy a call option, your intrinsic value is the spot price minus the strike price. When you buy a put option, your intrinsic value is the strike price minus the spot price. If this value is positive, then there is intrinsic value in it and if this value is negative then the intrinsic value in this option is zero (0).

Read Also: How to Make Consistent Profit in Option Trading 2024

Time Value 

Time value means that the time decay in the option premium is based on the amount of time left for the expiry of the underlying asset. That means that the premium of the option can decrease by the amount of time due to which the price can be reduced.

Each strike price of time value is also different. For both call and put options, ITM, ATM and OTM all these have time value. [Select the Best Stocks for Options Trading]

Determine Your Investment Objective 

Everyone has their own financial goals. Every different investor or trader has different objectives and some investors have the objective to remain safe and secure in the future, so they will not take risks. They will invest their money in a long-term project. 

So the objective of an investor or trader depends on their risk appetite. That means if their objective is safe and secure then his risk appetite will be low and if you want more profit or your goal is to get very quick returns, then in such a situation your risk will be high. Investing objectives help you to select the best investment strategies.

Create a Permanent Watchlists

There are some popular sectors like IT sector, financial sector, railway sector, automobile sector etc. You have to make a list of the top stocks of these sectors. 

Suppose you have selected 5 to 6 sectors and select 1 or 2 stocks from each sector, then a list of 8 to 10 stocks will appear in front of you, which you keep in your permanent watchlists. Apart from these 8 to 10 stocks, don’t even look at any other stock. [Select the Best Stocks for Options Trading]

Read Also: How to Become an Expert in Options Trading 2024

Risk Appetite

The amount of loss that a trader is willing to accept while making an investment choice is referred to as risk appetite. Trader’s risk appetite is their willingness to accept risks. While trading in options, risk appetite is a crucial factor in selecting stocks for options trading.

The quantity, pace or proportion of risk that a trader must endure in order to continue forward with its plans or objectives is referred to as risk appetite. Knowing one’s risk appetite level assists traders in planning their whole portfolio and Influences how they trade.

Each trader’s risk appetite is unique. For example, some traders have a high-risk appetite as well as the readiness to assume high risk. As a result, they are a risk-taking trader. On the other hand, some traders have a low-risk appetite and is prepared to accept a low-risk. As a result, they are a conservative trader.

Aggressive traders are well-versed in the market and willing to take large risks. The primary goal of these aggressive traders is to accumulate maximum returns through maximum risk taken. [Select the Best Stocks for Options Trading]

Conclusion

Always follow one rule that whenever you are with the trend of the market, you have a high chance of making profit. On the day the market trend is upward, trade more on those stocks which are moving in the upward trend. 

If the market trend is down then you have to pay more attention to those stocks which are in your sell list, then it’s very important to note in which direction the broader market is moving. 

Try to follow the movement of the market and do stock selections on your own, only then you have the possibility of making profit from the market and being successful in options trading. [Select the Best Stocks for Options Trading]

Read Also: Best Moving Averages for Options Trading

Frequently Asked Questions –

1. Which option trading is more profitable?

Option selling strategy is more profitable which has unlimited profit with limited risk.

2. Which stocks are best for option trading?

List of 10 best stocks for option trading:

• Reliance Industries 
• Hindustan Unilever 
• Tata Motors 
• State Bank of India
• HDFC Bank 
• ICICI Bank
• Infosys
• Adani Green
• Adani Ports 
• Bajaj Finance 

3. How many stocks are in the F&O list?

According to NSE, there are 185 stocks in the F&O list.