Best Stocks for Trading Options
Liquidity, volume and spread criteria for selecting stocks
Why Liquidity Matters Most
Liquidity is the most important factor when selecting stocks for options. An option is only as good as your ability to get in and out of it easily. Stocks with low options volume will have wide bid-ask spreads, meaning you pay more when you buy and receive less when you sell. A practical rule is that average daily options volume must be high enough to allow easy movement. The larger S&P 500 names usually have liquid option chains, though not all of them: within the index there are names trading thousands of contracts a day alongside others with very thin chains. Popular ETFs such as SPY, QQQ and IWM also have excellent options liquidity. Avoiding stocks with illiquid options is essential to trading successfully, especially for beginners.
Volume and Open Interest as Indicators
Daily options volume and open interest are the two best indicators of liquidity. Volume represents the number of contracts traded that day, while open interest is the total number of contracts outstanding. Both numbers should be relatively high for the option chain you are considering. A specific strike with high volume and open interest will be far easier to trade. Options with low open interest often have very wide spreads, which hurts your profitability. A strike should have at least a few hundred contracts in open interest to be considered reasonably liquid. Professional traders often trade only the most liquid strikes, typically those within 5-10% of the current share price.
Analysing Bid-Ask Spreads
The bid-ask spread is the difference between the highest price someone is willing to pay (the bid) and the lowest price at which someone is willing to sell (the ask). For options on highly liquid stocks, those spreads can be as small as $0.01. In less liquid options the spread can be $0.05, $0.10 or considerably more. A wide spread means you lose money on the round trip. For example, if you buy an option at the $2.00 ask and then sell at the $2.00 bid shortly after, you lose the width of the spread even though the option price never moved. For volume-based strategies such as day trading, tight spreads are essential. The tightest spreads are found in the most heavily traded large caps: Apple, Microsoft, Alphabet, Nvidia, Tesla or Meta.
Implied Volatility and Price Movement
Beyond liquidity, you also want stocks whose options have interesting implied volatility levels and predictable price behaviour. Highly volatile stocks have expensive options but also offer more profit potential for buyers. Very stable stocks have cheap options, but precisely because the market does not expect them to move: the breakeven is close, and even so price rarely reaches it. The market often overestimates or underestimates future volatility, which creates trading opportunities. Technology stocks generally carry higher IV than utilities. Stocks in cyclical industries tend to show more price movement. Finding the right balance between option liquidity and volatility appropriate to your strategy is key to success.
Recommended Stocks for Different Strategies
For beginners learning the ropes, we recommend focusing on mega-cap names such as AAPL, MSFT, GOOGL, TSLA, AMZN, NVDA and META. These stocks trade thousands of contracts daily with penny-wide spreads. ETFs such as SPY (S&P 500), QQQ (Nasdaq-100) and IWM (Russell 2000) are also excellent for options. These funds have extremely high liquidity at practically every strike. For more experienced traders looking for thematic or sector positions, names such as Adobe, PayPal, Netflix, Chipotle or Block offer sufficient volume and price range. It is best to avoid small caps, penny stocks and newly listed companies unless you have a very specific reason and fully understand the liquidity risks of their option chain.