Options trading involves taking risks to get a good reward. It’s suitable for all traders, from novices to experts. So, it’s important to know which stocks offer trading. Here, we look at ten stocks with stable profits and dividend payments or market volatility.
When picking stocks for option trading, consider the prices’ consistency and volatility, as well as the liquidity of the contracts. We explain call and put options. These let you buy or sell stock within a certain period. This helps you get profit or limit losses in the given time limit. We also provide you with strategies for each option type, and some strategies that can help you succeed when adding them to your portfolio.
What Are Options?
Options are a type of financial instrument. They give the owner the “right” to buy or sell a security at a specific price, by a pre-determined date. But, they don’t make it an obligation. Options are highly versatile and can be used in various strategies. It all depends on how conservative or aggressive the trader is.
In this article, we’ll explain what options are, the types available, and how they can be utilized.
Types of Options
Options are contracts which give buyers the right, but don’t obligate them, to buy or sell an asset at a fixed price before or on a certain date. Many investors buy options to gamble and make profits from short-term market fluctuations.
Options come in two main forms: calls and puts. Calls give investors the right to buy security at a specified rate (strike price) before it expiry date. Puts give them the right to sell shares at that rate before its expiration date. Investors choose which option suits their portfolios, based on the market outlook and how aggressive they wish to be.
Besides calls and puts, there are other strategies. For low risk, there are butterfly spreads; for more volatility, there are straddles; and collar spreads offer downside protection and permit capturing upside chances. Options can be used as a hedging tool or income generator, depending on the option chosen.
No matter the strategy, success with options depends on researching and scrutinizing each position before investing. With careful thought, one can figure out if options are a useful tool for reaching financial objectives, potentially reducing risks while increasing income in speculative trades.
Advantages and Disadvantages of Trading Options
Trading options is a good way to maximize returns while reducing risk. Options contracts have advantages and disadvantages that must be considered before trading.
- Control Leverage: Options can be used to control a large stock position without needing the same capital outlay as outright ownership.
- Lower Cost: Options are often cheaper than buying stock outright. This means more potential reward and lower risk of loss.
- Protection from Volatility: Options can be used to limit downside risks during market volatility.
- Limited Timeframe: Options have expiry dates, limiting timeframes for use.
- Loss Potential: If the options decline in value, a full loss is possible if the position is not managed correctly and closed out before expiry or assigned away if in the money at expiry.
- Opportunity Costs: Trading options involve complex strategies, which require lots of analysis and data tracking. This takes time and money, which could have been spent researching stocks.
Top 10 Stocks for Trading Options
Trading stock options is a great way to get maximum gains and steady returns. But, it’s key to pick the correct stocks. With hundreds of stocks obtainable, it can be hard to decide what’s best.
Here we will go over 10 of the top stocks for trading options in 2021. These stocks were chose based on many factors like liquidity, volatility, etc. that make them suitable for option trading.
Apple Inc. (AAPL)
Apple Inc (AAPL) is famous for its tech products like the iPhone, iPad and Apple Watch. Investors see potential to grow due to their product offerings and international presence. Therefore, traders use AAPL for option trading.
Options give investors the right to buy or sell shares of AAPL at a certain price in the future. It consists of a premium and an expiration date. With many trades, investors can make large profits from AAPL’s stock price changes over time.
AAPL is ideal for option trading as it has high liquidity and low bid-ask spreads. Also, share volume is higher than most stocks due to its wide ownership. Technical indicators suggest AAPL could go up in the short-term, offering opportunity for traders who bet the right way when buying and selling options connected to AAPL stock!
Microsoft Corporation (MSFT)
Microsoft Corporation (MSFT) is a tech giant. It sells soft & hardware products, plus provides services related to computing, cloud computing, digital info access, gaming etc. MSFT is listed on NASDAQ & trades near its all-time highs with potential for upside. It’s a top stock for trading options due to its liquidity, tight bid-ask spreads, large market cap, friendly cost structure for executing orders with brokers, good correlation with other tech stocks in NASDAQ 100 Index (NDX), & steady dividend income.
Options traders buy or sell contracts to add leveraged exposure to current trends & gain profits in both bearish & bullish markets. Trading MSFT options also lets traders speculate on future price movements without holding a large equity position during times of high volatility. However, investors should always consider their risk tolerance before any trades.
Amazon.com Inc. (AMZN)
Amazon.com Inc. (AMZN) is a great stock for trading options. It has a long successful history in the e-commerce retail business. Analysts also have a strong outlook on AMZN. Plus, its price action is relatively consistent.
This makes the stock highly liquid throughout the trading day. So, it’s easy to trade AMZN options contracts at any time during market hours.
When deciding whether to buy or sell call or put options, traders take several facts into account. For instance, Amazon’s growth over the last five years has been quite consistent. Its sales and gross profit margins have been stable for almost two decades.
Analysts predict up to 22% year-over-year sales growth in 2021. This is with revenues 33% higher than what was reported in 2020.
Plus, AMZN shares have achieved positive returns every year since 2008. Between October 2019 and November 2020, there were only three consecutive quarters of negative returns. This was due to coronavirus-related challenges.
Therefore, it’s a reliable stock for strategies like buying calls for leverage or covered call writing. This applies to both bearish pullbacks and spiking bullish sentiment days. Such days include earnings dates or strategic announcements from management teams.
Alphabet Inc. (GOOGL)
Financial experts agree: Alphabet Inc. (GOOGL) is a top choice for stock option investments. Being the parent corporation of Google, it has become a necessity in the connected world. This makes GOOGL a great option to invest in, due to its resilience against economic factors.
When investing in GOOGL, it usually follows a bullish trend. Although there are occasional dips due to external news or shocks, GOOGL is a solid long-term investment. It offers traders stability and gradual growth over time.
Given Google’s vast reach and dependence, it is a safe bet when deciding stock options to store over long periods. Its stocks are not too volatile compared to other tech giants like Apple Inc., so traders can analyze their portfolios with less worry about significant downturns.
Alphabet Inc. (GOOGL) is one of the best picks for investors looking into trading stocks with options due to its opportunity for steady returns over time and its stable management.
Facebook Inc. (FB)
FB is a great stock for trading options. It’s focused on the global crypto market, and has seen strong financial performance in recent years. It has outperformed its peers in the tech sector!
They’ve invested in blockchain projects like Libra, Calibra and Diem. Plus, they’ve just launched a cryptocurrency trading platform, with plans to go into more traditional markets.
For option trading, FB has lots of advantages. There’s a variety of expiration dates, from weeklys to LEAPS up to three years out. Plus, you can take on large positions with low initial capital requirements and lots of liquidity.
FB is one of the top stocks for option traders. It’s got strong fundamentals and potential for growth, so it’s great for binary events and diversifying portfolios.
JPMorgan Chase & Co. (JPM)
JPMorgan Chase & Co. (JPM) is a powerhouse in the financial services industry. It offers asset management, investment banking, trading options, and commercial banking. Because of its long history, it remains a reliable choice for traders looking to make money off of options trades.
Traders have more control when trading with JPMorgan Chase & Co. They can purchase large numbers of contracts over a short period of time. JPM has a big presence in retail banking, treasury services management, and corporate finance due diligence. It is expected to experience significant volatility with derivatives markets. This provides potential opportunities for options traders.
They can capitalize on market movements by setting up short call positions. This offers superior returns compared to other stocks in similar economic conditions. JPM also puts in stringent risk-control measures, making it a top choice in option trading today!
Bank of America Corporation (BAC)
Bank of America Corporation (BAC) is one of the most popular stocks for trading options. It has a large market capitalization and high liquidity. Its stock price has increased by 6% year-to-date and 10% since April 2018, making it attractive to investors.
BAC stands out from other optionable stocks due to its low trading costs and fees. The contracts also feature competitive time values and implied volatilities. This makes it a great choice to speculate or hedge positions. There’s also long-term potential for investors. Plus, the company has diverse businesses reducing risks.
In conclusion, BAC is ideal for options trading. It has a large market size, good liquidity, low costs and a diverse portfolio. This creates opportunities to speculate on short and long term performance in order to make potential profits.
Tesla Inc. (TSLA)
Tesla Inc. (TSLA) is an American car and energy firm. It is publicly traded and specializes in electric vehicles, solar products, and energy storage solutions. Founded in 2003, Tesla is now the world’s most valuable car maker. It is also one of the most bought stocks, due to its popularity with investors.
Options traders like Tesla, as it is volatile – often growing and dropping within short periods. This makes it perfect for short-term traders looking to make a quick profit. It also ranks among the top 10 stocks with the highest open interest for options trading. This means there are more buyers, encouraging traders to take bigger risks.
Thus, traders should consider adding Tesla Inc (TSLA) to their top 10 list when looking for options trades.
Johnson & Johnson (JNJ)
Johnson & Johnson (JNJ) is a stock in the Dow Jones Industrial Average (DJIA). It has a market cap of $373 billion and offers intraday and long-term investment opportunities.
JNJ is divided into three segments: consumer health care, pharmaceuticals, and medical devices and diagnostics. These come with various risks such as product recalls and litigation. Therefore, investors must pay attention to related news.
JNJ is the largest component of the S&P 500 with a weighting of 8%. This makes it influential in terms of market sentiment and trading options. Also, its high liquidity allows investors to exit positions quickly.
To trade JNJ options, investors should consider things like economic outlooks, cyclical sectors, external events, dividend policies, and earnings dates. Knowing these factors can help traders achieve their goals.
The Walt Disney Company (DIS)
Walt Disney Company (DIS) is one of the best stocks for trading options. It’s the world’s second biggest media giant and it consists of four big business segments:
- Media Networks
- Parks and Resorts
- Studio Entertainment
- Consumer Products & Interactive Media
Disney is doing well thanks to its investments. It’s focusing more on streaming services and content investment. It also has a leading position in film production, cable TV networks, theme parks, cruise lines, consumer products retailing and other businesses.
Options traders like Disney because of its volatility. Even though it can move a lot in either direction, it pays 1.55% dividends each year. It has diverse investments that provide stability for its stock. Investors should still be careful, but option traders may want to add DIS to their watch list.
No definite answer exists to which stocks are the best for trading options. It depends on your strategy and objectives as a trader. Research each stock and assess its volatility and liquidity. After reviewing all factors, make an informed decision on which stock works best for you.
Remember, trading in the options markets involves risk. Losses can be sustained, so traders need to understand potential risks. Additionally, evaluate financial resources prior to making trades/commitments with brokers/exchanges. These measures can help traders maximize their chances of success when trading options on stocks.
Frequently Asked Questions
Q1: What are the best stocks to trade options?
A1: The best stocks to trade options depend on your investment goals and risk tolerance. Some of the top stocks for options trading include Apple, Microsoft, Amazon, Tesla, and Google.
Q2: How can I find out which stocks are the best for trading options?
A2: There are many online resources that can help you identify the best stocks for options trading. You can also consult with a financial advisor to get more tailored advice.
Q3: Are there any risks associated with trading options?
A3: Yes, trading options carries risks, just like any other form of investing. It is important to understand the risks associated with options trading and to only invest with money you can afford to lose.