Options underlying advice?

T

TraderGreg

I'm a small time trader, and I will be doing generally two or three options per trade. I have been paper trading for about three weeks, but I'm having a problem picking solid underlyings for my strategy.

I am purchasing long puts and calls with a time frame of 2-5 days. Because of this, I searched industry-to-industry for stocks with trading volume over 1,000 (first in money calls and puts separately), with spreads less than 6% (bid-ask of same puts and calls), and in the top 1-4 of their industry (very general rule, had to be a big enough company to trade).

With these specification, I developed a list of about 45 stocks to trade, along with the ETFs of QQQQ, SPY, DIA, IWM (didn't look into further ETFs at that point yet).

Anyway, my goal was to be diversified enough to find several setups and have a nearly neutral position on the overall market (actually I decided if i was bullish i would by put/call 2:4 and vice versa).

However, I found that nearly all my underlyings flow with the market. If the market goes up, I made a bundle, and the only puts that didn't fail were negative betas like oil (so much for netting near neutral). I couldn't find put setups while the market was rising, and my calls failed when it turned. The opposite was true.

I found myself netting 4%, 7%, and 5% during the weeks, but I was constantly cutting calls when the market turns and puts when it turned back. I didn't like my exposure.

So, I started looking at more ETFs, and considering options on global ETFs, but there were very few that met my liquidity specifications.

Any insight or advice? Thanks for your help!

Best Regards,

Greg
 
If I was an option buyer, I'd gladly pay a large spread for a double. Nor would I care how many option traded per day, week or month. Lliquidity criteria shouldn't be your primary consideration for long positions. You want to find stocks that will move and benefit them.

If you're going to trade short term, look for situations where the underlying could move sharply. That would be things breaking news (earnings releases, conference calls, economic reports, lawsuits, acquisitions, FDA approval/denials, etc.). Focus on the underlying, not the option.

FWIW, if you're netting 4-7% a week, you're doing quite nicely. Now see if you can do that consistently... or at least a lot more often than you don't.
 
i would also look at larger price stocks like fslr,goog,pot,they move in large swings and can pay well,and i would short call or put sprds so that the premium erosion is not working against you,they also dont go against you as fast and you aren't stopped out as often,pot has a head and shoulders set up with the neckline at 202 ,if it works ,it could drop 40 - 60 points,short the 140/200 call sprd or buy the 210 /150 put sprd, above 208 or so it didnt work
 
Hi Greg,

AAPL options are so liquid and the bid/ask so tight (usually .05-.10 cents) you can day trade them based on the chart action (and news action) of the underlying. The liquidity allows you to safely place a stop without much slippage, which lets you determine your max loss in advance. You can control many shares of a high priced stocked for very little outlay. I bought 10 contracts at the end of the day before the weekend rush for their new phones, and took $4500 profit right after market open the following Monday before their pre-market gap closed (buy the rumor, sell the news). Even 1 contract would've returned $450. I've day traded them twice before that based on 3- and 5-minute chart action, making $500 in a matter of 30 minutes or less each time.

Donna
 
Quote from NoDoji:

Hi Greg,

AAPL options are so liquid and the bid/ask so tight (usually .05-.10 cents) you can day trade them based on the chart action (and news action) of the underlying. The liquidity allows you to safely place a stop without much slippage, which lets you determine your max loss in advance. You can control many shares of a high priced stocked for very little outlay. I bought 10 contracts at the end of the day before the weekend rush for their new phones, and took $4500 profit right after market open the following Monday before their pre-market gap closed (buy the rumor, sell the news). Even 1 contract would've returned $450. I've day traded them twice before that based on 3- and 5-minute chart action, making $500 in a matter of 30 minutes or less each time.

Donna
More...
aapl has a head ans shoulders also, support is around 132
 
Thank you for your replies.

My other criteria was that the stock had to be priced under $100. This was due to my starting capital, which is just $2,000 right now. If I want to work on 4-6 positions like I want, the options on stocks >$100 are too expensive to buy either the first in or first out of the money option, which is what I am comfortable with until I gain more experience.

Anyway, I think I am going to expand a bit. My original list was about 63 stocks, but I trimmed down my bid-ask spread to less than 6% down from 8%, which cut it down to 45. Then, I'll add the half dozen or so ETFs I found which fit my specifications.

Once I earn a bit more money, my doors will be opened to higher-priced stocks, as well as writing. Thanks for your help.

Best Regards,

Greg
 
Quote from TraderGreg:

Thank you for your replies.

My other criteria was that the stock had to be priced under $100. This was due to my starting capital, which is just $2,000 right now. If I want to work on 4-6 positions like I want, the options on stocks >$100 are too expensive to buy either the first in or first out of the money option, which is what I am comfortable with until I gain more experience.

Anyway, I think I am going to expand a bit. My original list was about 63 stocks, but I trimmed down my bid-ask spread to less than 6% down from 8%, which cut it down to 45. Then, I'll add the half dozen or so ETFs I found which fit my specifications.

Once I earn a bit more money, my doors will be opened to higher-priced stocks, as well as writing. Thanks for your help.

Best Regards,

Greg
More...

I see. You can still do a lot with a $2000 account. I recently grew my son's $1400 account to $2800 in a couple months with very low priced stocks (JASO, AHR, CDS) and 1-contract option plays.
 
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