Options trading provides a way for investors to potentially profit in any market environment. By buying and selling call and put options on stocks and ETFs, traders can capitalize on upside and downside moves. Options can also help hedge portfolios or generate income.
When selecting stocks and ETFs for options trading, liquidity is critical. Symbols with high daily volume allow traders to efficiently enter and exit positions with tight bid/ask spreads. Volume is also needed to support complex option strategies involving multiple legs.
This article explores stocks and ETFs that consistently rank among the most actively traded options. It also covers key concepts about options, risks, and strategies to provide helpful context.
Most Actively Traded Options Symbols
Certain stocks and ETFs perpetually rank among the highest for daily option volume. The table below shows the top 10 symbols by average daily option contracts traded over the past month.
|Avg. Options Volume
|SPDR S&P 500 ETF (SPY)
|Tracks the S&P 500 index
|Invesco QQQ Trust (QQQ)
|Tracks the Nasdaq-100 index
|iShares Russell 2000 (IWM)
|Tracks the Russell 2000 index
|Graphics processing chips
|Consumer electronics, software
|Advanced Micro Devices (AMD)
|E-commerce, cloud computing
|Marathon Digital (MARA)
|Software, cloud computing
*Data sourced from TradeStation, current as at December 29, 2023
The SPDR S&P 500 ETF (SPY) and Invesco QQQ ETF (QQQ) consistently have the highest activity since they track major indexes. This allows traders to gain exposure to the broader market.
Large, volatile stocks like Tesla, Nvidia, and Apple are also perpetual favorites. Their popularity and liquidity make options trading efficient.
Some securities, like cryptocurrency miner Marathon Digital, enter and exit the top volume list based on recent news and interest.
READ ALSO: Options Trading: Call Options
What Are Stock Options?
Before diving into trading, it helps to understand what options are and how they work.
Stock options are financial derivatives that give buyers the right, but not the obligation, to buy or sell shares of the underlying stock at a predetermined “strike” price by the expiration date.
Call options provide the right to buy shares. Traders buy calls when bullish on the stock.
Put options give the right to sell shares. Traders buy puts when bearish on the stock.
Reasons traders use options include:
- Leverage – Options can generate outsized returns from large stock moves.
- Income – Options strategies like covered calls sell options against stock to collect premiums.
- Hedging – Puts protect long stock positions from downward moves.
- Speculation – Traders bet on upside or downside based on market expectations.
Options have defined expiration dates when the rights disappear if not exercised. Popular expiration cycles are monthly, quarterly, and weekly.
Benefits and Risks of Trading Options
Below are some key benefits and risks to weigh when considering trading options:
- Leverage to magnify returns from large stock moves
- Hedge portfolio risk using put options
- Generate income from options premiums
- Fine-tune market exposure using spreads and other strategies
- Potentially benefit from rising volatility
- Options expire worthless if strike price isn’t reached
- Potential for unlimited losses selling naked calls
- Complex tax treatment compared to stocks
- Requires margin accounts and options trading approval
- High risks if trading without a clear strategy
Options are complex instruments that are not suitable for all investors. They can expire worthless, unlike stocks, which retain shareholder value after purchase. Traders should develop a clear trading plan with risk management to avoid potentially unlimited losses.
Options Trading Strategies to Know
Below are a few common options trading strategies to give a basic overview:
- Long calls – Buy calls when bullish on the stock to benefit from upside.
- Long puts – Buy puts when bearish on the stock to benefit from downside.
- Covered calls – Sell call options against long stock positions to collect premiums.
- Cash-secured puts – Sell puts against cash collateral to collect premiums.
- Vertical spreads – Combine a long and short option at different strikes to limit costs.
- Iron condors – Use two vertical spreads simultaneously to profit from non-movement.
- Straddles/strangles – Position with long call and put for volatility upside.
These represent just a sampling – there are endless combinations of multi-leg option spreads and strategies traders utilize.
Timing Options Trades
Success with options depends greatly on timing. Traders should consider:
- Entry price – Buy options when implied volatility and premiums are relatively low.
- Strike selection – Choose realistic strike prices, giving enough room for the stock to move.
- Expiration – Balance more time for the stock to move with the higher costs of longer-dated options.
- Exit timing – Develop plans for closing positions before expiration based on profit goals, stock movement, days remaining, and other factors.
Getting trade timing right is challenging but helps maximize profits and avoid expiring worthless.
Options trading carries higher risks than simply buying stocks or ETFs. Traders should implement smart risk management:
- Limit position size – Allocate only a small percentage of capital to options trading until gaining experience.
- Use stop losses – Exit options positions with defined stop levels if stocks move adversely.
- Trade liquid options – Stick to very liquid symbols like those in the top volume list to ensure easy order fills.
- Avoid naked call writes – Writing calls without owning the stock risks unlimited losses in a runaway market.
- Watch for expiration – Close positions before expiration to avoid having options automatically exercised. Pay close attention to options ending soon.
- Don’t overtrade – Avoid excess speculation. Follow a trading plan with defined entries, exits, and maximum losses.
Applying prudent risk management avoids account blowups and large losses.
Finding Other Options Trading Candidates
While the mega cap stocks and ETFs discussed see the highest absolute volume, thousands of symbols have actively traded options. Traders can screen for other potential candidates with a few filters:
- Look for higher relative volume – Compare the option volume to the stock’s overall average daily volume to identify symbols seeing more concentrated option interest.
- Find increasing volume – Rising option volumes may signal developing trader activity in a name.
- Screen by sector – Look for options volume leaders in sectors poised to outperform, like technology or energy.
- Focus on liquidity – Ensure bid/ask spreads are tight enough for efficient trading.
- Monitor volatility – Higher and rising volatility benefits options pricing.
Key Questions to Ask Before Trading a Stock’s Options
When evaluating a stock for options trading, ask these questions:
- How liquid are the stock and its options? Look for tight bid/ask spreads.
- Does the stock have high short interest? This can amplify volatility.
- Is the stock in an upward or downward price trend? Momentum is valuable for timing entries.
- Does the company have upcoming catalysts like earnings, product releases, or events? Catalysts move prices.
- What is the stock’s overall volatility level? Higher volatility boosts option premiums.
- Does the stock have high institutional ownership? Institutions can trigger big moves with buy or sell decisions.
- Is the market optimistic or pessimistic about valuation? Sentiment shifts drive prices.
Considering factors like these helps find promising option trading candidates.
Finding the Right Options Broker
Broker selection is important for active options traders. Key factors include:
- Commissions – Options trades involve multiple legs, resulting in higher commissions. Look for discounted option trades.
- Margin rates – Many strategies require margin. Seek brokers with competitive rates.
- Tools – Look for screeners, probability analysis, profit/loss charts, and trading ideas.
- Education – Search for brokers with learning resources about options strategies.
- Customer service – Options questions can get complex. Make sure support staff are knowledgeable.
- Mobile trading – Applications with full trading capabilities are ideal for options traders needing to act quickly.
- Approval levels – Brokers control approval for different options strategies. Understand any limitations.
Comparing brokers on factors like pricing, tools, education, and service helps options traders select the best platform.
Options Trading Tax Treatment
Taxes on options trades present challenges compared to buying and holding stocks. Some key considerations:
- Short-term vs. long-term – Options held for less than one year generate short-term capital gains taxed at income rates. Long-term gains receive preferable tax treatment.
- Expiration – Options expiring worthless creates short-term capital losses. These offset gains and reduce tax bills.
- Assignment – Exercised options are treated as purchases and sales of stock, with applicable capital gains/losses.
- Wash sales – These rules disallow recognizing losses on securities repurchased within 30 days, including options.
- Tax forms – Brokers will issue a 1099-B reporting annual gains/losses. Schedule D reconciles this with tax returns.
Complex options trades make tracking gains and losses challenging. Traders should use good recordkeeping and work closely with tax professionals for proper reporting.
How to Get Started Trading Options
Follow these steps to begin trading options:
- Open a brokerage account – Major firms like Fidelity, E*Trade, and Tastyworks offer solid options platforms.
- Request options approval – Brokers must approve clients for different options strategies beyond simply buying calls and puts.
- Start small – Limit positions to just 1-2 contracts until you gain experience. Options are high risk.
- Learn options basics – Read educational resources and watch videos to understand functional options before attempting strategies.
- Develop a trading plan – Form a strategy including selection criteria, position sizing, entries, exits, and risk management.
- Use a paper trading account – Simulated trading allows realistic practice before committing real capital.
- Review tax implications – Understand how options alter tax treatment compared to simply buying stocks.
- Seeking guidance – Consider one-on-one training from an experienced options trader to learn proven strategies.
Trading options without a clear plan and risk management exposes accounts to potentially significant losses. But when practiced prudently, options provide savvy traders with valuable strategic tools.
Pros and Cons of Trading Options vs. Stocks
Below is a summary comparing options trading to simply buying stocks:
- Leverage provides potential for larger returns
- Can benefit from upside or downside moves using calls and puts
- Hedge or generate income through options strategies
- Gain exposure with lower capital than trading stocks
- Options expire worthless if strike price isn’t reached
- Significant tax implications from expiration and exercises
- Higher commissions given multi-leg strategies
- Requires margin account and options approval from broker
- The risk of losses are higher if trades aren’t managed properly
- No expiration dates like options have
- Familiar buy-and-hold strategies work well for stocks
- Tax treatment is very straightforward; owning stocks long-term
- Avoid need for margin or options approval requirements
- Risks generally lower owning quality companies long-term
- There is no leverage so requires more capital than options to generate income
- Limited abilities to profit from falling stocks
- Vulnerable to full downside risk from market declines
There are merits to both options and traditional stock investing, depending on one’s goals and risk tolerance. Prudent investors may incorporate options selectively to enhance broader portfolios.
Options Trading Mistakes to Avoid
Those new to options trading should avoid these common mistakes:
- Trading without a strategy – Blindly trading options rarely ends profitably. Have a well-defined trading plan.
- Chasing premiums – Avoid overpaying for options out of fear of missing trades. Patiently wait for favorable opportunities.
- Not managing risk – Fail to limit position size and use stops. This can lead to account blowouts.
- No exit plan – Don’t let options expire worthless. Close positions according to a pricing plan.
- Overtrading – Excess speculation leads to more losing trades. Follow your plan’s frequency guidelines.
- Emotional trading – Fear and greed cause poor trading decisions. Follow your strategy’s logic, not emotions.
- Ignoring tax implications – Frequent options trades create tax headaches. Keep good records.
With proper education, avoiding common mistakes gives options traders a better chance for long-term success.
Options trading presents experienced investors with additional opportunities to potentially profit in bull and bear markets using calls and puts. While riskier than simply owning stocks if not managed prudently, options enable leveraging upside and hedging downside when applied strategically.
This introduction summarized key options concepts, explained top actively traded symbols, provided an overview of popular options strategies, and covered important factors for getting started.
The most important takeaway is that options are complex instruments requiring education and experience before trading. Never speculate recklessly without a solid trading plan and a risk mitigation mindset. Mastering options trading is challenging but can pay dividends for investors willing to continuously learn the craft.
Options Trading FAQs
Below are answers to some frequently asked questions about options trading:
Are options riskier than stocks?
Yes, options generally carry more risk than buying stocks because they expire worthless if strike prices aren’t reached. Stocks have inherent value as fractional ownership in companies. However, the upside potential of options makes them attractive trading vehicles. Manage risk smartly.
What is the best options trading strategy?
No single options strategy is universally best. Traders employ a variety of strategies based on market outlook and goals. Common examples are covered calls, cash-secured puts, vertical spreads, and iron condors. Study different strategic approaches and find those that match your trading style and risk tolerance.
How much money do you need to trade options?
Most brokers require minimum balances of $2,000 or more for margin accounts approved for options trading. However, best practice is to allocate no more than 5-10% of capital to options until gaining experience managing the risks. Trading options requires education and strategic skills.
Are there options on all stocks?
There are options available on several thousand underlying stocks and ETFs. Typically, the highest options for volume and liquidity concentrate around large cap stocks and major indexes like S&P 500 stocks. Small cap stocks may not have options traded actively enough for efficient trading.
What times are best for trading options?
When trading options, consider volatility and liquidity. The most volatile times, like market open and close, often provide more opportunities. However, spreads may also widen in fast markets. Balance volatility with sufficient liquidity in the middle of the trading day based on your strategy needs.
How much do brokers charge for options trades?
Online brokers charge around $0.50 per contract for options trades in addition to ticket fees. Deep discount brokers like Webull and Robinhood offer free options trades. Given the high volume of contracts traded using strategies, commission costs are a significant factor.
How are options taxed compared to stock trades?
Options held short-term face higher taxes. Profits are taxed at income rates instead of preferential long-term capital gains rates for stocks held over one year. Additionally, tax-loss harvesting rules differ, and options that expire worthless create short-term losses. Monitor closely.
Is it possible to consistently profit trading options?
Yes, it’s possible to generate consistent income trading options but it requires education, experience, and discipline. Skilled options traders use strategic approaches and prudent risk management to navigate market shifts. As with any trade, results will vary based on multiple factors.
Are there options that let you trade 24/7?
Some brokers now offer extended or 24/5 options trading on certain products to allow after-hours and pre-market trading. However, low volume and wide spreads during off-market hours make execution quality less reliable. Trade outside standard market hours cautiously.
In another related article, The Finest Options Trading Brokers for October 2023
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