Option Scanning: How to Find Puts with the Highest Premium

there are thousands of stocks available to trade on the market which means there are even more potential option contracts that you can trade with all of these numbers and charts and data where do traders even begin to look as they're trying to form a trade idea one answer is a scanner in short a scanner is a tool that helps do the legwork for you as it scours the market in search of stocks that match the specifications you're looking for so how do we choose these specifications let's get into it welcome back to the hourglass trader where as time passes we make money so on the screen right now we have td ameritrade's thinkorswim platform and we have the scan tab up if you don't have access to td ameritrade or you're not from the united states and can't open an account with them there are a lot of other generic scanners that might be available either through your broker or somewhere online and we'll try to link to some of those online scanner resources that you could use to set up something similar to what we're about to lay out in this video so since we like to sell options we love starting our ht wheel strategy with cash secured puts for the purpose of this video and running through how to set up a scanner we're going to build a scanner that gives us the highest returning puts that are slightly out of the money in the market at a given time so there are going to be five elements to this and it's going to be implied volatility percent out of the money days to expiration return on risk and volume so let's get into each of those as we build our scanner step by step to try to pull what we're looking for which is high premium puts that are on the market expiring soon so the first element that we mentioned we're going to add a filter here for options is implied volatility and just to back up a little bit you go to the scan tab it's probably by default going to have you on stock hacker you're going to want to move over to option hacker so we can scan for options as opposed to stocks so we're going to look for implied volatility so why do we want this we love implied volatility as option sellers because it means high premiums and when we're looking to sell options we love high premiums because the higher the premium the more money we're going to make so for this we're going to make a minimum of about 75 of and that's going to be expressed as a percentage so 75 with no max on it we don't want to cap the implied volatility because objectively just the higher the better on stocks like this so the second filter you go right here to add another filter is going to be another option filter and we're going to filter for percent out of the money see if i could find it here right there at the bottom percent out of the money so when we sell options we want to take advantage of extrinsic value since that's the portion of the option that is subject to theta decay by selling it out of the money put which is what we're going to establish right here we ensure that 100 of the premium we receive is extrinsic in nature and it maximizes the benefit that we receive from theta decay when we sell options so we're going to put this in here with a minimum of about 0.5 percent what you do as long as it's below 1 or something like that it doesn't really matter and we're going to put a max of about 7 on here now normally you would say why do we want to put a max on this i want to get all the options possible but uh if we have no limit our scan is just going to be flooded with different expertise of the same ticker so this way we kind of cut down a little bit on the amount of data that's being thrown at us because sometimes when you run a scan like this it can be a little bit overwhelming and we want to cut down on the amount of tickers we see so if there's something that's offering a lot of premium it's going to show up on here a lot if we didn't cap this off because it's going to show just about every single strike that they have available so putting this cap of 7 limits that list of options that we're going to see on here makes the data a little more digestible and gets us a little more variety in the amount of tickers that we see which is more useful as we try to come up with trade ideas so that covers the first two tickers let's add another filter and our third is going to be another option one and it's going to be days to expiration and this filter is thrown on here to get a list of options expiring this week so we're going to have a minimum of zero and a maximum of six which should give us options expiring within the week now this is a personal preference of mine because in general you're going to receive more premium by selling four consecutive weekly contracts than one monthly option so to kind of illustrate this let's take a look at amd for example so if you look at the january 22nd just out of the money puts we'll do 87.5 they're going for about a dollar 75 of premium now if we click down here into the next monthly set which is going to be february 19th those same 87.5 strike puts are going for about five dollars and 50 cents so that's a pretty big difference now when you're opening short-term plays you open yourself up to some other risks which involve short-term price movement but as long as you're comfortable with taking assignment running the ht wheel strategy that we outline uh when we sell cash secured puts then all those short-term risks are going to be mitigated so just to kind of tie this all back together we have this filter on again just because we believe that selling puts as close to expiry as possible as demonstrated over here by the fact that these cumulative weekly options bring more premium than one monthly option we believe that selling puts as close to expertise possible is the most profitable strategy that we can run when we're running an option selling strategy so that's what we have this day is to expiration between zero and six to give us a list of weekly options so let's jump to our next one number four and this is arguably going to be one of the most important ones we have on here and it's going to be return on risk this kind of goes hand in hand with the first filter as it's designed to pull in the best premiums in the market return on risk is essentially equal to the return you receive on the amount of money that you risk obviously so in its purest form i do believe this is the best way to evaluate and search for the options with the best returns on the market and when we run our put scans and post our trade ideas for the week return on risk is really the metric that we use since that is the one metric from a profitability standpoint that takes in the amount of cash you're risking when you fully cash secure puts the way we do when we run our ht wheel strategy so we're going to have this at a minimum of about 1.75 percent and this is another one that we're not going to want to cap on because the higher the return the better for us right here so that's going to take us to the fifth and final filter that we have on this basic put scan that we're putting together it's going to be another option filter and it's going to be for volume so we'll scroll down here a little bit and we'll find volume near the bottom of the list so this is the fifth and final filter like we mentioned and this represents the number of contracts that were traded that day for a specific option putting a minimum volume of 20 in here as we're going to do ensures that all the results i see in my scan are actually things that people are holding and trading instead of just getting some odd outlier from a weird bid-ask spread for an order that really wouldn't actually fill if you put it in so we have all that together this volume filter that we've capped this off with ensures that all the options we see on here are going to be tradable and going to be actual ideas that we can pursue with our own money and our own trade ideas so there you have it all five of those and just to run the scan you're going to hit this down here the scan button obviously and it's going to tell you you've requested a very large amount of information because this literally looks through every single ticker on the market but that's going to be okay it's not going to do anything too crazy to your computer and you can go up here to minimize it you'll see it's bringing up about 253 stocks so kind of looking at this list it's a lot of information to digest so how do we kind of cut into this and determine which of these are the most profitable puts well we'll go back to that filter we talked about which is return on risk so you'll see from the basic display right here you don't really get any information about the return on risk you get the symbol you get the description you get the last price of the option the change of during the day and the price of that option which can be super useful but when we're scanning for high premium puts we're going to want that return on risk information so if you go to the little settings cog and go to customize you're going to be able to see all these different things that you could pull into your scan table and your results so if you go down here remember it's called return on risk and i'm probably doing this the most painstakingly slow way by just absolutely scrolling from top to bottom here we're gonna get return on risk right in the r's and we're going to add that item and just for a little more visibility we're going to move it up right next to percent change so if we click ok we'll see return on risk pop up here and again this varies pretty wildly and it looks like it's looks like it's sorted and it looks like it's sorted without really much order but again this is kind of what we want to look at so you could go up here and choose what you want these results sorted by so if you go into optionable underlying metrics you're going to see down at the bottom again you have return on risk and it's going to sort it by that and again that's what we're looking for i probably sound like a broken record at this point in the video but return on risk is really what we're looking for because that's one of the single best indicators of profitability of an option so we'll run that scan again it'll give us our results and i accidentally did ascending it should be descending so we'll try this again and there you have it so this is going to pull the highest returning out of the money puts on the market today now since we're doing this on a weekend this is going to be pulling data from friday at market close but a lot of these should be actionable by the time the market opens for the next trading week so this is really kind of the list that we were going after and with those five filters that we put on we were able to come up with so if you're looking through here just because something's on here doesn't mean it's a good trade idea and that's probably the first and foremost point that i want to make as we're going through this just because you're able to run the scan and pull all these uh return on risk items doesn't mean that okay i can get a 15.7 percent return getting max profit on this i should do this well let's look at gamestop this is that's one that's been in the news a lot lately so if we take a peek at the chart you might not want to get in on this because if there's any sort of reversion to the mean you could see a price down in the high teens low 20s if it goes down to where it uh gapped up from previously when it was short squeezed so that's one that you might not want to go after but again this is really just for informational purposes as you're trying to form trade ideas so there you have it this is how you throw together a basic scan and think or swim that fetches the puts with the highest returns in the market and again we did this on the thinkorswim platform but any basic option scanner should have similar inputs if you wish to build this yourself on another platform the next step after this is taking the information we receive here and generating meaningful insights to form trade ideas that we can act on we'll go over how to evaluate potential candidates for a trade in a future video but for now we'll leave you guys with the basics on how to scan for good premium so you can play around with it for yourself in the meantime subscribe on here and give us a follow on our other social media platforms our discord chat is 100 free to join and is full of like-minded option sellers of all account sizes and experience levels so if you're looking to learn how to safely and effectively sell options you'll be sure to fit right in until next time this has been the hourglass trader where as time passes we make money

Channel: The Hourglass Trader

Views: 5,281

Rating: 5 out of 5

Keywords: option, scanner, premium, puts, investing, trading, options, selling, how, to, strategies, strategy, explained, stocks, trader, finance, market, stock market, hourglass trader, hourglass, beginner, money, safe

Id: JeAiH4mS3YU

Length: 11min 12sec (672 seconds)

Published: Fri Jan 22 2021