Derivatives

How to identify stocks for options trading

Akhil Nallamuthu | Updated on February 20, 2021

How to identify stocks for option trading? Which time frame chart to refer to?

- Santosh

When it comes to options trading, choosing the stock can be easy. Two important factors are liquidity and volatility. High liquidity means you will not face problems while getting in and out of a trade and volatility is traders’ friend as the popular saying goes. Nevertheless, a lot can vary depending on which side of the trade you want to be in.

Buyer: Buyers can be better off if they trade in high-beta stocks given that theoretically, option longs have unlimited gain and limited loss. But you should be cautious since time is against you especially during the expiry week and the week before. Here is when options experience more time decay. Also, timing can be key as the stock price should reach certain level within a given time.

Seller: Buyer’s loss is gain for sellers. Hence, opposite of what we discussed above is beneficial in shorting. Sellers can make money when the stock is not trending, and time decay works in favour of sellers. Importantly, option selling requires more margin whereas the maximum outflow in option buying is the premium. But theoretically, losses are unlimited when the bet goes wrong.

Time frame: Time frame depends on whether you are a day trader or a positional trader. For intraday trading, time frames less than a day, for example, hourly chart, can be good. But if you are a positional trader, daily and weekly charts can be suitable.

Published on February 20, 2021

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