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Options trading is not for beginners, but for experienced investors who want to add another dimension to their portfolios, hedge against risk, limit losses, or take big risks in order to achieve outsized profits, options offer many, well, options.
Read: Do you want to diversify in a bear market? Consider these 6 alternative investments
While the best stocks for options trading are different for every investor, there’s a reason some trade much more heavily than others. If you’re considering entering the exciting world of options trading, read on to learn about the stocks that boast some of the highest trading volumes and to get a better understanding of how options trading works and what you can gain and lose .
While only you can determine the best option trading stocks for your individual investment strategy, you can only benefit by understanding why the highest option volume securities are as popular as they are.
|company||50-day average options volume||segment|
|SPDR S&P 500 ETF (SPY)||485,128||Tracks the S&P 500|
|iShares Msci Emrg Mkts (EEM)||180,567||Represents the MSCI Emerging Markets Index|
|Invesco QQQ Trust (QQQ)||165,530||Tracks the Nasdaq-100|
|iShares China Large Cap (FXI)||139,508||Tracks the FTSE China 50 Index|
|Apple (AAPL)||130,335||consumer electronics and software|
|iShares Russell 2000 (IWM)||104,026||Tracks the Russell 2000|
|Spdr S&P O&G Expl (XOP)||96,581||Tracks the S&P Oil & Gas Exploration & Production Select Industry Index|
|Advanced Micro Devices (AMD)||61,335||semiconductor|
|Tesla (TSLA)||43,405||electric vehicles|
|Netflix (NFLX)||40,536||streaming media|
Which stocks are best for options trading?
The following stocks have seen the highest trading volume among options traders over the last 50 days.
1. SPDR S&P 500 ETF (SPY)
This exchange traded fund tracks the Standard & Poor’s 500 Index. The S&P 500 represents the 500 largest publicly traded US companies and is the leading benchmark for the stock market as a whole. It’s by far the most heavily traded options stock, as many options traders like to bet on the future direction of the stock market in general, rather than just a company’s direction.
2. iShares Msci Emrg Mkts (EEM)
Emerging markets and the companies that operate there are less stable and therefore more volatile than large companies headquartered in wealthy developed countries. Companies that gain a foothold in emerging markets have the potential for huge returns, which is why they are so popular, but they also come with far greater risk. Therefore, they deliver the high-highs and low-lows that options traders crave.
3. Invesco QQQ Trust (QQQ)
This ETF tracks the non-financial stocks of the Nasdaq 100 and is therefore heavily biased towards technology. Large-cap growth stocks in the technology sector are more volatile than the broader market.
4. iShares China Large-Cap (FXI)
According to Bloomberg, since the US entered a bear market, options traders have been investing heavily in Chinese stocks as part of a “risk reversal” strategy. As US stocks fell, Chinese stocks proved resilient, attracting options traders looking to hedge their bets.
5. Apple (AAPL)
With a market cap of more than $2.5 trillion, Apple is the largest company in America. Traditionally, this level of size and stability makes a company an unlikely candidate for options trading, but Apple is actually more than twice as volatile as the market average.
6. iShares Russell 2000 (IWM)
This ETF tracks the Russell 2000 Index, known as Small Caps. Unlike the large-cap behemoths with 12- and even 13-figure market caps, small-cap stocks are known for the kind of high volatility options traders crave.
7. Spdr S&P O&G Expl (XOP)
According to the US Energy Information Administration, energy and fuel resources are much more volatile than other commodities because consumers cannot substitute alternative sources no matter how wildly prices fluctuate. As such, funds that track energy indices, like XOP, tend to have large gains and large losses, which naturally attracts options traders.
8. Advanced Micro Devices (AMD)
The US government has taken steps to prevent AMD from exporting its most advanced and sophisticated chips to China, triggering the kind of wild volatility options traders love to bet on.
Tesla has traded with high implied volatility. This means that options traders expect large price swings in one direction or another in the near future. Part of the reason for all this implied volatility could be due to Elon Musk, its erratic and controversial leader, whose ongoing battle with Twitter has sparked major ups and downs in Tesla stock lately.
Netflix spent years as Wall Street’s golden child on a pedestal with Facebook, Apple, Amazon, and Google as one of the heralded FAANG stocks. But fierce competition, subscriber losses, and internal controversy led to sharp declines. According to Nasdaq, Netflix is trading with one of the highest implied volatilities in the entire options market today.
11. NVIDIA (NVDA)
Like AMD, Nvidia has seen huge price swings recently as its primary technology has been caught in the crosshairs of a trade war with China.
Are options better than stocks?
Options are no better or worse than stocks, bonds, mutual funds, futures, or cryptocurrencies. They’re just another asset class that has a place in many investors’ portfolios. Because they derive their value from an underlying asset, options are classified as derivatives.
These underlying assets are typically 100 stocks, but options contracts can be written on just about any asset class, including commodities, bonds, and currencies. Different investors use options for different reasons, such as hedging against market downturns, generating income, or as a speculative bet in search of big gains.
Options trading isn’t any better or worse than investing in stocks, but it’s different — and it comes with a different level of risk and reward potential.
Can you get rich trading options?
One of the reasons options trading is so attractive is that during periods of volatility, there is room for profit no matter which way the volatility moves. Options traders are betting on the direction they think a security, an index, or the entire stock market will go in the future. It also gives them the flexibility to buy or sell a contract’s assets up to the contract’s expiration date without obliging them to do so.
You can get rich trading options, but according to Merrill, most options investors use strategies that limit their risk but also their potential for gain.
However, some strategies, such as uncovered short calls, expose options traders to the potential for unlimited losses. When buying options as a long call, on the other hand, the profit potential is unlimited, but the maximum loss is limited to the premium paid.
Which option is best for day trading?
According to DayTrading.com, options have not typically been a part of traditional intraday trading until recently. Today, however, day traders often incorporate options trading into their strategies.
It’s important to note that day trading is generally risky and carries the potential for quick and significant losses – adding options to the mix only ups the ante. Before you think about what type of options trading is right for you as a day trader, you should consider the increased risk.
According to Bloomberg, options trading began during the pandemic when people were locked at home, often unemployed, experimenting with ways to make money. The outcome was predictable — during the bull run that took place after the original COVID-19 crash, day traders lost $1.14 billion in trading options.
Options trading is riskier and more complicated than traditional buy-and-hold investing in stocks — but that doesn’t mean retail investors can’t learn how. However, learning should come before doing. Do as much research as you can and decide on a strategy before diving into options trading.
When you think you’re ready, sign up for a brokerage account that lets you test your strategy with a real-time trading simulator before risking any real money.
Information is correct as of September 13, 2022 and is subject to change.
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