Vertical Spread Options | What stocks are best for options trading?

hey it's Eric from the vertical spread Academy YouTube channel and in this video we're going to talk about which stocks and ETFs are best for trading options if you haven't done so already be sure to hit the subscribe button for more auction trading videos so basically there are two main criteria I look for before deciding if I want to trade options on particular stock or ETF and first I like to look for a tight bid-ask spread and we're going to go into detail here on that in a minute and second I like to look at the volume and open interest of the option chain to make sure there's enough trading or activity going on in multiple strikes so that you know I can get in and out of a trade when I want to so essentially what I'm looking for our stocks and ETFs that are highly liquid and that are easy to get in and out of without paying too much to the market makers now before we look at these two things in detail I'm going to put a link in the description of this video of where you can go to get a great list of stocks and ETFs with liquid options that have already met the criteria we're about to talk about and if you go there I'm going to send you a CSV or spreadsheet with all the ticker symbols so you can upload it into your brokerage platform pretty easily and that way you'll have a nice watch list of stocks and ETFs that you can start looking at in your own platform now the stocks on this list aren't the only ones that are liquid an entire universe of stocks but it's a great starting point if you're not sure which ones to trade so let's go ahead and get into the option chain for a couple stocks and we'll start talking about those criteria so let's start with the ESPE why the fpy is the probably the most liquid ETF or stock there is it's so heavily traded it tracks the whole market the option chain is just as liquid as well so let's start with what the most liquid thing and maybe you'll get an idea of you know why why this is a good instrument or vehicle for trading so the first criteria we talked about was the bid a spread and you can see in the columns here this is the bid this is the ask and essentially this is you know the difference between these two numbers is essentially the fee that you're going to pay and this has nothing to do with your Commission's this is the market maker fee that you're going to pay to get in and out of a trade in addition to the Commission's of whatever you're you know deal is with your brokerage so so the closer together these two numbers are the less fees that's going to come out of your profits and it's going to be you know it's kind of indicative of getting in and out of the trade so we look at the bid a spread here we can see that the at the money call options and put options the spread is somewhere between one and two cents and that's about as liquid as you get so what that means is if I wanted to buy and I'm just kind of looking at the June options here if I wanted to buy the 293 call option I would have to pay two dollars and ninety three cents now for whatever reason I decide instantly all you know what I changed my mind something happened I want to get out I could turn around and sell it right away for two dollars and now it's ninety one but you know I can certain turn around and sell it and only lose a penny or one dollar per option so that is a pretty tight spread and if we take a look at you know sort of I like to look at the percentage of the value that that represents so I'm going to bring up a calculator here and and basically we're talking about you know point one one cent and if we divided by the price we'll say it's two point ninety two you can see that the the slippage is sometimes what they call it or the fee that we pay the market maker is less than one percent way less than one percent of the actual value of the option when we're buying it and selling it okay so just kind of keep that in mind we'll compare what that looks like so in essence if if you bought the call option and you may let's say you made twenty percent or whatever when you go to sell it you're going to have to give back point zero zero three of that twenty percent so less than one percent of your profit would get lost in this mix oh that's good that's a good thing this is the most liquid thing so the second thing that I like to look at is is there a lot of liquidity or action if you want to call it that trading at multiple strikes and we can see here that in the open interest in volume there hundreds and thousands and tens of thousands and many of the strike prices that are way sort of you know on the call side in the money and out of the money there's 144,000 open interest out of the money there's tens of thousands in the money so it really gives me some options to you know where I want to trade if I want to sell and out of the money put spread there's a lot of liquidity here there's a lot of action going on and out of the money put spreads if I want to sell out of the money call spreads again there's a lot of action here so these are the two main criteria that we look at or I look at the bid-ask spread we want to be nice and tight and we want a lot of liquidity and multiple strikes here ok so let's take a look at another stock or this is an ETF but let's take a look at a stock that isn't as liquid but it's not horrible and I'm going to bring up Akamai Technologies particular aka em and again I'm looking at the same month as the June's and you can see that when we look at the at the money options here that the price of the option is 66 cents but the spread is actually three cents now when you think about that it's not that much more than it was on the SP why the SP why was one or two cents this is about three cents the problem with the three cent spread is that that is a big percentage of the actual value of the actual option so let's go back to the calculator here so again the spread is 0.3 if we divide that by will just say 60 in this case 67 cents you can see that the spread itself is about 4% of the of the option and what that means is if you made it let's go back to our 20% example if you bought a call option and you were up 20% in order to sell it and look the spreads now 6 cents but we did 3 cents but in order to sell it you would have to give back 4% that's what your that's what the slippage is and that again has nothing to do with commissions so again when you're when you're trading options you want the bid in a spread to be very very tight my general rule is if you're paying more if the spread is more than 3 or 4% of them that like said this isn't too horrible but it's not the best if the spread is too wide meaning you're going to have to give back more than four percent or so of your profit just to get out then I typically would kind of steer away from it especially when you start getting the spreads when you start getting the credit spreads you actually had or debit spreads you have to you know you have to spreads you're dealing with and this was just a single call option so the other thing we look for we talked about was multiple strikes is there a lot of action now the act of money options here for a combine them and the standard monthlies isn't horrible it's it's in the hundreds you know chances are you're not buying a million of them so it's okay but but when you look at you know you really can't go out that many strikes you really have to play around the the center here so again if I wanted to sell in a bear call spread you know that's actually not too bad that you have hundreds here but you know you still end up having to sell to getting a premium something that's relatively close to the money so to me I wouldn't really want to do spreads on Akamai maybe if you're speculative you want to buy call option or put option whatever maybe that's not horrible but again you even buy sort of an at the money put option the difference in the spread is about ten percent so that means you would have to make at least ten percent not to lose money in this particular put option so this is sort of an example of the options aren't you know the worst I've ever seen but compared to you know the SP y-you know you just you would want to stay away from this one so let's go to something a little bit more popular let's just check out Apple real quick Apple has great options and let's just kind of put Apple through the same test so again we're going to look at the bid a spread in this case it's about two cents on a two dollar option which basically puts you at about one percent so that's not too bad and again if as long as our spread is sort of less than you know a few percent of the option I'm good with it second criteria you know can I do out of the money options pretty easily yeah there's thousands of you know open interest on the out-of-the-money both on the call and put site and in the money so that way if you you know if you sell a put spread or whatever and you want to get out or close it early or starts to go against you you're able to get out and that's really you know one of the things about trading options or anything you want to be able to get out when you have your profit or if it's going against you and you want to minimize your losses you want to be able to get out easily so you need liquidity you need thousands of contracts trading but you also want the spread to be tight so you don't lose more money so let's let's bring up the calculator one more time for this one so again the spread was two cents I'm going to divide that by dollar ninety eight and again it's about one percent so the slippage and Apple options are about you know one percent for this particular option and they change as you go in and out but but that's the main criteria that I'm looking for for trading my op so that hope that gives you some information on you know when you go to trade a particular stock and you want to trade options when you look at the option chain that gives you two things to look at again the bid-ask spread and how many options are trading up and down the chain and again take a look at the description of this video for a link and if you want to get that spreadsheet I'll send it right over you guys have a great day and we'll see you at the next video

Channel: Stock Market Options Trading

Views: 10,665

Rating: 4.8640776 out of 5

Keywords: vertical spread options, Best stocks for options trading, highly liquid options, best etfs for trading options, best efts for option spreads, best stocks for option spreads, options trading education, vsa, options trading 101, options trading basics, options trading explained, options trading for beginners, options trading for dummies, options trading strategies, options trading tutorial, trading option contracts, trading option spreads, trading options for beginners

Id: LMOZngc4gu4

Length: 10min 15sec (615 seconds)

Published: Wed May 17 2017