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How to Choose Stocks for Options Trading

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Written by Timothy Sykes
Updated 4/20/2023 7 min read

Choosing the right stocks is the most important part of options trading. When you make random trades, you get random results.

But finding the right stocks is easier said than done. In this article, we’ll dive into the best ways to choose stocks for options trading.

New to options trading? Learn more about the basics of options trading and how to make money from it.

If you want to learn even more about options trading, there are quality mentors out there like my former student Mark Croock. He’s made $3.9 million in his career, mostly through trading options. His Evolved Trader program is one of the best options trading courses out there.

Even if you don’t trade options, the stock-picking tips below will help your trading. Let’s get into it!

Do Detailed Stock Research

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Research is your first step. Trades are like icebergs — 90% of the work happens under the surface.

Here are some of the things you should be looking at:

  • Price action
  • Volume
  • Chart patterns
  • Recent news

These factors should be the basis of any trade. They’ll give you context to understand any new developments.

Identify Liquid Stocks

Liquid stocks have a good amount of volume. Volume both stimulates demand — and lets you exit a trade when you want to.

Volume and liquidity aren’t the same though. Higher volume leads to better liquidity. Liquidity is more of a qualitative measure.

You might not think that liquidity is as important in options trading as in regular stock trading. It is.

Liquidity in options trading helps you sell contracts…

It also stimulates the price action that will help your options trade execute.

Look for Tight Bid/Ask Spreads

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The bid/ask spread is related to supply and demand. It represents the difference between the buyer’s maximum price and the seller’s minimum price.

The application of bid/ask spreads in stock trading and options trading is similar. It’s a measure of liquidity.

Liquid stocks have narrow bid/ask spreads because there’s more demand. Meanwhile, illiquid stocks have wider bid/ask spreads because there’s less demand.

Review Historical Data and Charts to Identify Trends

In stocks and life, history doesn’t repeat — it rhymes.

Find a stock with a record of tradable chart patterns. That record can indicate future performance.

Identifying former runners is one way to identify high potential stocks. Studying their charts gives you a sense of how the stock responds to volume and catalysts.

Studying chart patterns is also essential for seeing trends. The market tends to follow the psychology of crowds. When you study these patterns enough, you’ll see them playing out in active charts.

Monitor Implied Volatility

Implied volatility represents the market’s view of a stock’s future volatility. How does it differ from plain old volatility? What we call volatility is usually historical volatility, based on a preexisting chart. Implied volatility is the consensus on how likely the stock is to move in the future.

Implied volatility is important for options trading. The more volatility, the better the chance that the option will hit its strike price. High-volatility stocks usually have higher options premiums.

You can think of volatility in options trading in a similar way to stock trading. I don’t care if a stock holds onto its gains — what matters are the tradable moves.

Identify Future Events That Might Impact Stock Prices

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News and earnings reports are big catalysts for volatility. Depending on how the market receives the news or earnings, they can result in downward or upward swings.

Check the chart to see how it’s reacted to news and earnings in the past. These factors can be a seed for trade ideas.

Determine Your Trading Objective

Random trades are bad trades.

Always know your goals and have a plan before trading. Your trades should be part of an overall strategy that points toward your ultimate goals.

This is how you master your emotions, and stay committed to the marathon — not the sprint.

Take Advantage of Stock Screeners

A good stock screener is your biggest tool for identifying stocks that fit your strategy.

I love StocksToTrade’s trader-built stock screener… I even participated in its design. It’s customizable enough to fit any strategy. And its pre-built scans might give you some ideas you hadn’t already thought of.

Grab a StocksToTrade 14-day trial for $7 and see your trade ideas multiply!

Build a Watchlist

You can’t keep track of 16,000 stocks. That’s why watchlists exist.

Self-sufficient traders maintain several watchlists. In addition, they’ll build daily and weekly watchlists to focus their attention even further.

Check out this awesome video with two of my millionaire students breaking down their watchlist techniques:

Mark posts a weekly watchlist for his Evolved Trader students. Seeing the stocks — and more importantly, the thought behind them — will get you well on your way to building your own watchlists.

Final Thoughts

The biggest takeaway here is that choosing stocks for options trading isn’t some magic trick…

It’s the result of hard work — doing research, studying charts, and building watchlists.

Nobody knows which stocks are going to trend up or down in the future. The way that you put your options trades in the best position to be profitable is by doubling down on your work ethic, and paying attention to traders like Mark Croock who know what they’re doing.

How do you choose stocks for your options trades? Let me know in the comments!

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Timothy Sykes

Tim Sykes is a penny stock trader and teacher who became a self-made millionaire by the age of 22 by trading $12,415 of bar mitzvah money. After becoming disenchanted with the hedge fund world, he established the Tim Sykes Trading Challenge to teach aspiring traders how to follow his trading strategies. He’s been featured in a variety of media outlets including CNN, Larry King, Steve Harvey, Forbes, Men’s Journal, and more. He’s also an active philanthropist and environmental activist, a co-founder of Karmagawa, and has donated millions of dollars to charity. Read More

* Results are not typical and will vary from person to person. Making money trading stocks takes time, dedication, and hard work. There are inherent risks involved with investing in the stock market, including the loss of your investment. Past performance in the market is not indicative of future results. Any investment is at your own risk. See Terms of Service here

The available research on day trading suggests that most active traders lose money. Fees and overtrading are major contributors to these losses.

A 2000 study called “Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors” evaluated 66,465 U.S. households that held stocks from 1991 to 1996. The households that traded most averaged an 11.4% annual return during a period where the overall market gained 17.9%. These lower returns were attributed to overconfidence.

A 2014 paper (revised 2019) titled “Learning Fast or Slow?” analyzed the complete transaction history of the Taiwan Stock Exchange between 1992 and 2006. It looked at the ongoing performance of day traders in this sample, and found that 97% of day traders can expect to lose money from trading, and more than 90% of all day trading volume can be traced to investors who predictably lose money. Additionally, it tied the behavior of gamblers and drivers who get more speeding tickets to overtrading, and cited studies showing that legalized gambling has an inverse effect on trading volume.

A 2019 research study (revised 2020) called “Day Trading for a Living?” observed 19,646 Brazilian futures contract traders who started day trading from 2013 to 2015, and recorded two years of their trading activity. The study authors found that 97% of traders with more than 300 days actively trading lost money, and only 1.1% earned more than the Brazilian minimum wage ($16 USD per day). They hypothesized that the greater returns shown in previous studies did not differentiate between frequent day traders and those who traded rarely, and that more frequent trading activity decreases the chance of profitability.

These studies show the wide variance of the available data on day trading profitability. One thing that seems clear from the research is that most day traders lose money .

Millionaire Media 66 W Flagler St. Ste. 900 Miami, FL 33130 United States (888) 878-3621 This is for information purposes only as Millionaire Media LLC nor Timothy Sykes is registered as a securities broker-dealer or an investment adviser. No information herein is intended as securities brokerage, investment, tax, accounting or legal advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation or sponsorship of any company, security or fund. Millionaire Media LLC and Timothy Sykes cannot and does not assess, verify or guarantee the adequacy, accuracy or completeness of any information, the suitability or profitability of any particular investment, or the potential value of any investment or informational source. The reader bears responsibility for his/her own investment research and decisions, should seek the advice of a qualified securities professional before making any investment, and investigate and fully understand any and all risks before investing. Millionaire Media LLC and Timothy Sykes in no way warrants the solvency, financial condition, or investment advisability of any of the securities mentioned in communications or websites. In addition, Millionaire Media LLC and Timothy Sykes accepts no liability whatsoever for any direct or consequential loss arising from any use of this information. This information is not intended to be used as the sole basis of any investment decision, nor should it be construed as advice designed to meet the investment needs of any particular investor. Past performance is not necessarily indicative of future returns.

Citations for Disclaimer

Barber, Brad M. and Odean, Terrance, Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors. Available at SSRN: “Day Trading for a Living?”

Barber, Brad M. and Lee, Yi-Tsung and Liu, Yu-Jane and Odean, Terrance and Zhang, Ke, Learning Fast or Slow? (May 28, 2019). Forthcoming: Review of Asset Pricing Studies, Available at SSRN: “https://ssrn.com/abstract=2535636”

Chague, Fernando and De-Losso, Rodrigo and Giovannetti, Bruno, Day Trading for a Living? (June 11, 2020). Available at SSRN: “https://ssrn.com/abstract=3423101”