How to Choose the Best Stock for Selling Options
A question that I receive often is: “How do I find the best stocks for selling put options?”
Considering a bulk of my trading strategy revolves around selling options, it’s something I take very seriously.
For the past few weeks, and even months, I have been selling puts and it has been working out great.
In this article I want to show my process in choosing these stocks. This includes revealing my own personal checklist that I use for every trade.
My Checklist: How I Pick the Best Stocks for Selling Put Options
There are 15 points for picking the best stocks to sell options on.
One of the first things that I look for is volatility in how the stock has been trading. When you sell options, you want to have that volatility because it creates higher premiums.
One great way to check for this volatility is seeing if the stock shows up on the TradingView hotlist. Ideally, it’ll be there for a few days in a row. This means that the stock is being highly traded over that period.
Personally, I look for stocks that are relatively cheap: let’s say trading between about $20.00 and $50.00 per share. Why is this? Well, when selling puts, I need to make sure I am okay owning the stock at that strike price if I get assigned.
I also need to make sure I have the buying power in case I do get assigned. It’s why I don’t recommend selling a large number of puts for a stock that costs $1,000.00.
Remember that each option contract accounts for 100 shares of the stock. So even one contract at $1,000.00 will cost you $100,000 if you are assigned. Keep that in mind.
Ready for the rest of the checklist? Here are my 15 points that will help you choose the best stocks for selling options.
Let’s get started. First, I want to talk about the scanner and the hotlist.
Option Selling: Scanner And Hotlist
As I already mentioned, I like to use TradingView and it’s ‘hotlist’ on the upper right-hand side of the app. Here’s an image of it below:
If you zoom in on the image, you’ll see that list shows the US volume gainers for today. It also shows the percentage change losers. Normally you probably wouldn’t look at that but when selling options, it gives a great picture of daily volatility.
So on the day I snapped this image, it shows that INO was up by 21%, GE down by 2.0% and AMD up by 0.5%. One of the things on my checklist I’m looking for is stocks that are experiencing a substantial down move. I always want to enter selling put options on a down day!
I’m not exactly going in order here, but Step 15 on the checklist is: Are you entering on a “down day”?
I want to find stocks that have been on this list for quite a few days. I also created my own scanner and I want to show you exactly how I use it to find the best stocks.
TradingView is great because it has a stock screener built in. I customized it to fit my trading strategy.
Here are the criteria I enter into the screener when looking for stocks for option selling.
All I want to see is:
- Common Stocks
- The last price is above $5.00
What about the volatility? I want to see a change of price that is down by at least 2.0%. The more the better. For trading volume, I want to see between 1 and 50 million shares.
I’m not too picky when it comes to the sector! As long as it meets those other criteria I will consider it as a stock to sell options on.
The Importance of Volatility
I keep stressing the importance of volatility and it is a key part of the checklist. Remember the things I am looking for: cheap stock with high volatility. This is important when trading in a smaller-sized account.
Why is this important? You need to ask yourself if you are okay with owning the stock at the strike price for a long-term hold. If you get assigned these shares, there is a chance you will be holding them for a while.
Here’s what I like to do in order to figure this out:
For the stock you are considering, switch to the Weekly chart. I like to zoom out over the past few years.
Alright, so as you can see for this stock, which is EHEALTH Inc, it has been going up and up and is still fairly expensive. But on the day I took this snapshot, it was down by 12%.
I know I said I’m not too picky about the sector, but this says financial sector so I’m not that interested. Let’s move on to the next stock.
The next stock on the list is XP. As you can see from the chart, XP just started trading publicly a little while ago. That’s a pass for me.
I would put this under my category of a ‘crazy stock’. I just don’t know how this stock is going to perform because there isn’t much of a history of it. Let’s find one that makes more sense.
Here we have Arconic Corporation (ARNC).
Here’s what I’m looking for:
I want to see that over the past few years, it has been trading at a fairly high level and just recently because of the market crash has been crashing down.
Look at that chart for ARNC. Looks like it checks off all my boxes.
I also want to make sure that I’m not trading into earnings, and when I took this image it was still 39 days until earnings. I’m flagging this stock as a possibility.
Now we have Boeing. Boeing (BA) is always a great stock to trade. Except at the time it was five days from earnings. No thanks. Trading into earnings can cause too much volatility and unpredictability.
I’m still going to flag Boeing though, just to show you my process.
Another great stock that I often trade is Spirit Aerosystems Holdings (not to be confused with Spirit Airlines). So in the image below, I’m looking at the options that are twelve days to expiration.
Over the past few years, since 2017 actually, it has been trading between $60 and $90. At this time, Spirit was trading at $18. When I see stocks like that, I flag them too.
Norwegian Cruise Line Holdings (NCLH) is another consistent one. All of these were pretty hard hit by the pandemic as you can imagine. I did notice that NLCH had its earnings in about twelve days, but that’s probably far enough out where we’re still okay.
Okay, so now that I have a few stocks, I input the symbols into my option calculator.
Just to recap: I have ARNC, BA, SPR, and NCLH.
Let’s go back to my put options calculator.
Option Selling: Finding The Best Strike Price
I’m entering ARNC, BA, NCLH, and SPR into my calculator.
I enter the exact price at what the stock is trading to see if there is enough premium. It also tells me what the best strike price is to trade them at.
Next up? Once I’ve entered these, I always go back to the chart to look for natural support and resistance levels.
Natural Support Or Resistance
Back to my checklist: Natural support and resistance help you with choosing the best strike price.
Is the strike price at least one standard deviation away?
Can it drop at least 25%?
Is the delta in an acceptable range?
Is the strike price at natural support below?
These are all things I look at when choosing the right strike price. Now that we have four stocks, let’s take a look at the charts and determine the natural support or resistance levels we can use.
Here I’m switching back to the daily chart and I am going to start with ARNC.
Looking at ARNC it seems that right here at the $5.00 level there is some natural support. It hasn’t really dropped below that level so it looks like a good place to look at a strike price.
So I can take a look at the strike price of $5.00 here and the stock will need to drop about 38% to hit that. That’s pretty good!
Now we do the same process for Boeing (BA).
At this time it was trading for about $130.00. The natural support level I see recently is at about $110, which is only about a 15% drop. Let’s go further down to the $90.00 strike price.
What about SPR? The support level is here around $12.00 – $13.00. Let’s try that as the strike price.
I’ll let you know that NCLH at the $8.00 strike price is a level I like a lot. In fact, I traded this exact support level shortly before I took this snapshot. Looking back at my account I made about $1,000 to $1,300 profit from that NCLH trade.
Let’s use the $8.00 and maybe even the $7.50 for comparison.
Each of these stocks can drop by at least 25% in all of these setups. That’s a great setup, but we still need to find enough premium between now and expiration.
Now let’s jump over to my trading platform to take a look at how these trades might play out.
ARNC Options Premium
We’ll start with ARNC. On the options chain at this time the $5.00 strike price we can get is about $0.30 in premium. That means we’d make about $131.00 per day. That sounds pretty good! We can actually go as low as $0.25 and it would still meet my criteria.
I know that I’m going fairly quickly here, I just wanted to give you a high-level overview of how I think when setting up these trades.
BA Options Premium
Now on to BA. I’d like to do a similar setup here with the $90.00 strike price. We’ll probably get about $1.73, and we have some more reliable data here.
While that looks high, remember that earnings are just five days away so I want a very short expiration date to avoid trading through earnings. This means I’d actually only make about $43.00 per day. I like to make at least $100.00 per day for each position I am in.
SPR Options Premium
On to SPR. We were looking at a strike price of $12.00. The options chain is only giving me a strike price of $12.50. That’s not too bad and for an expiration date of a few weeks out, I get a premium of $0.25. But plugging this into my calendar only provides about $44.00 per day. Still not enough!
NCLH Options Premium
The last stock is NCLH. For this, I was looking at the $7.50 strike price which will bring in about $0.30 to $0.35. For the expiration date I am eyeing, it will pay about $103 per day. Not bad at all!
Option Selling Recap
Let’s just do a bit of a recap here:
- I went to my stock screener and selected four stocks out of the 42 or so that matched my criteria.
- I plugged these four stocks (ARNC, SPR, BA, and NCLH) into the option calculator.
- Three of them didn’t make sense, but NCLH did.
- I kept in mind that NCLH is reporting earnings in about 12 days.
- Usually, I’m closing these trades before expiration anyways so 12 days is more than enough time.
One More Look At NCLH
Let’s take one last look at NCLH before I actually make the trade.
First, I’d play around with the expirations a bit. The shorter expiration at the $7.00 strike price would give us about $0.15 in premium. Does that make sense? Not for me, since I’d only make about $64.00 per day.
So let’s go back to the expiration date I originally chose at the $7.50 strike price.
If we could get $0.35 I’d be ready to lock this in. Ideally, I’d want at least $0.40 which is about $118.00 per day. But we can’t always be greedy.
As I already mentioned, I like to see a minimum of $105.00 per day. If I can make $103.00, like for this NCLH trade, I’ll be fine. I’ll survive!
As I said, I already closed a trade on NLCH at a profit so I know how this stock likes to move. This familiarity certainly helps too and you might find that you have a small group of stocks you end up trading.
I hope this article on selling options was helpful. I know I didn’t cover all 15 steps of my checklist, but it’s there for you to review if you need to.
In this article, I covered the most important parts of choosing the best stocks to sell put options for, so I hope you can incorporate this into your own personal trading strategies.