If you’re wondering how to pick stock options for trading, you’ve come to the right place. In this guide, you’ll discover the secrets to picking the best stocks for options trading on a routine basis. The process we’re going to share with you is simple and straightforward – and takes very little time out of your day. Anyone can use this strategy to make supplemental income in the stock market!
It goes without saying that picking the right stocks for options trading is key to seeing a high success rate and earning consistent profits with this strategy. We likely don’t have to tell you that – that’s why you’re here in the first place. So, without any further ado, let’s get into our guide on how to pick a stock for options trading.
How to Pick Stock Options for Trading: The Complete Guide
First, we encourage you to learn how to analyze a stock in the first place. After all, options contracts are based on an underlying stock – and the fundamentals you’d use for uncovering winning swing trade stock picks are very similar to how you’d uncover good stocks for options trading.
To find good stocks for options trading, you can use moving averages or other technical trading indicators. Better yet, set up screeners that help you identify trends on autopilot each and every day. The earlier you’re able to spot trends, the more favorable your terms will be when picking the actual options contract to trade. The strike price, exercise date, share quantity, and other terms are all secondary to the opportunity in the stock itself.
And, because picking the right rock is paramount to your success rate with options trading, there is really only one approach we recommend: using VectorVest. But even before you start picking stocks for an options trade you need to figure out what you hope to get out of your trading strategy.
First – Figure Out What Your Goal is With Options Trading in the First Place
The “best stock options contract” isn’t one size fits all. What’s best for you may not be best for the next person – because chances are, you have different goals with options trading. That’s why the first step in how to pick stock options to trade is figuring out what you hope to get out of this investment strategy.
Are you trying to generate supplemental income by speculating on whether a specific stock is going on a bull or bear run? Or, are you looking to hedge an existing position in a stock by purchasing options contracts? These are the two most common reasons people get into options trading – but maybe you have an entirely separate reason.
The point is, the stock you pick for options trading is largely dependent on your goal. So once you know what that goal is, you can get to the fun part – figuring out how to pick a stock for options trading.
The Easiest Way to Pick the Best Stocks for Options Trading – With VectorVest
There are countless ways you can uncover options opportunities. Really, it comes down to speculation. You need to speculate on how a stock’s price will trend in the future – either up or down. Maybe you use market-wide data for this – or, maybe you look at stock-specific data. Either way, being able to predict stock price trends is easier said than done. There’s one way you can set yourself up for success, though.
VectorVest is a revolutionary stock analyzing software that tells you which stocks to buy – along with exactly when you should buy and sell them. The system is all based on a proprietary stock rating system that simplifies trading for good. With just three ratings you can gain all the insights you need to make informed, accurate decisions in the stock market.
The best part? In the software, you gain access to pre-configured stock screeners that bring in the best stocks to trade on any given day. You can be the first to know about trends so you’re able to get the best possible value for your options contract. You can even use it on the go with a mobile stock advisory app – so you never have to worry about missing an opportunity again.
In terms of actually finding a good stock for options trading, what criteria should you look for? Mainly, volatility. It doesn’t necessarily matter which, because you can purchase options contracts regardless of if you’re bullish or bearish.
This is another reason VectorVest is such an invaluable part of your options trading process: it makes trend identification super easy through the relative timing (RT) rating. Like the two other ratings used in the VectorVest system (relative value and relative safety), the RT rating sits on a scale of 0.00-2.00, with 1.00 being the average. A rising RT rating above 1.00 indicates a positive price trend, whereas a falling RT rating indicates a negative price trend is forming.
There are screeners in place within VectorVest that are focused on the RT rating specifically – making things even easier. With the help of VectorVest, the hard part of learning how to pick stock options is as straightforward as it gets. From there, it’s just a matter of picking the right contract.
Are You Bullish or Bearish?
Once you’ve identified a stock with volatility that you want to capitalize on, it’s time to take a stance – are you speculating that the stock will go up or down?
If your research suggests a positive price trend forming, you’ll want to buy call options contracts so you can purchase the stock at a discount. On the other hand, if you’re speculating that the stock is headed for trouble, you’ll want to buy put options that allow you to sell stock at a premium.
Determine the Rest of the Options Contract Terms
The last piece of the puzzle is picking out the rest of the options contract terms. You’ll need to decide how much you’re willing to pay for each option in premium. This directly affects your profits.
You also need to figure out the ideal strike price and expiration date for your contract. To do this, you’ll want to consider risk and reward. A strike price closer to the current price is easier to attain and increases your chance of a win. It also will likely cost more in premiums and earn you lower profits. Similarly, options contracts with exercise dates further out in the future are more favorable for trading – but they are more expensive. Your unique risk tolerance and trading strategy will influence where you fall in the risk/reward conversation. Learn more in our article on option trading risk management.
Once all these pieces are in place, you can confidently purchase an options contract that will help you achieve your trading goals. With a bit of discipline and determination – plus a reliable tool like VectorVest – picking stocks for options trading doesn’t have to be difficult or overwhelming.
From here, it’s just a matter of logging into your brokerage and finding an options contract that meets your selection criteria. After purchase, you’ll monitor the position and await the contract to be in the money – at which point you’ll exercise your options. We have a full guide on when to exercise stock options if you’d like to learn more. You can also learn about taxes on options trading because hopefully, you’re going to earn substantial profits over the next year!
If that doesn’t happen, you’ll eventually want to cut losses and sell the contract for what you can on the open market – if anything. Otherwise, the options contract will expire worthless, becoming null and void by the expiration date. By following the advice we provided earlier for how to pick a stock for options trading, you can minimize these occurrences and ensure a successful trading strategy.
Final Thoughts on How to Pick Stock Options
We hope you feel more confident in how to pick stock options after reading this complete guide. The most important takeaway from this discussion should be to carefully consider the specific stock in question when looking for options trading opportunities. Ensure it not only aligns with your trading goals but is uncovered through a reliable, repeatable process. With VectorVest, this is easy. You can see the system in action firsthand through a free stock analysis today.
Or if you want to learn more about buying options contracts, explore our blog. Learn about warrants vs options, stock vs stock options, swing trading vs options trading, or even swing trading options. Otherwise, it’s time to set yourself up with a VectorVest account today to start searching for that first options trading pick!