When you’re learning how to trade stocks, you may come across a number of different strategies and approaches that can diversify your portfolio and improve your chances of earning higher returns. One of these is options trading, which is a strategy that allows you to hedge risk while earning income. Understanding the strategy can also help you determine the best stocks for options trading.
Options trading gives you the right to buy or sell an asset at a set price by a certain date. You aren’t obligated to buy or sell, but you can if a situation presents in which it makes sense to do so. An option stock is also called a derivative because its value is derived from an asset. Many traders use options to hedge risk, speculate about potential high-yield stocks, and earn income. Stock option contracts are often written for 100 shares of stock, although they can be written on other types of assets, including commodities, currencies, and bonds.
When you consider adding some options to your portfolio, it’s helpful to understand the power behind this method of buying and selling stock. Options add more diversity to your portfolio because they can add more leverage and protection, as well as provide high-yield earnings. Regardless of your investing goals, you can typically find an option contract that works with what you are trying to accomplish. For example, you might add options as a way to hedge against a stock market that is in a downturn, helping to lessen downside losses.
Many traders also look at the best stocks to trade options on when they are trying to speculate on the direction that a specific stock or asset might move in the near future. Doing so can serve as a way to wager on a potential increase in value. Although options trading can serve as a way to minimize risk for some traders, this strategy is not without any risk. All trading, options trading included, involves some risks that you should be aware of before starting a trade.
Part of investing is learning how to manage risk, determine how much risk you are willing to take on, and bounce back from trades that didn’t go quite how you expected them to go. When you understand the strategy behind options trading, you may decide this is something you want to pursue for your own portfolio, as a way to invest in companies that may be on an upward trend in the near future.
Types of Options
The two main types of options in the trading world are called call options and put options. A call option grants you the right to buy a specific stock, while a put option allows you to sell that stock. You can also think of a call option as a down payment that you are making for a purpose that could benefit you in the future.
An example of a call option is an investment on a new home, which you paid $30,000 as a down payment on to lock in a price of $400,000 for the new house. Regardless of the current market value of that home, you have the right to purchase it for the agreed-upon price because you chose to invest early. As long as the terms of the contract option are still valid, the buyer has the opportunity to purchase the asset outlined at the set price.
When you own options, you have four actions you can take. These include buying and selling call options and buying and selling put options. The name of this strategy refers to the different options you have when it comes to adding to your portfolio and getting rid of certain stocks or other assets when the time is right.
List of Stocks for Options Trading
Finding the best stock options to buy is an important step in applying this strategy to your own method of trading. Each day, the best stocks for options trading could change. You may be looking at the best stock options to buy today, only to find that those are no longer the best stock options the next day. Some of the best stock options today include:
AMD, a well-known manufacturer of computer processors, is one of the best stocks to buy options because it is having a strong year so far, reporting an increase of more than 40% in the value of its shares. Google recently confirmed its plan to partner with AMD for a new video gaming service, Stadia, which is likely a main factor in the increased value of the company.
The brand also has a series of GPUs, sold under the line titled Radeon, and these products are in high demand. These two factors help to push AMD onto the list of good option stocks, so consider adding some shares to your portfolio.
Although Facebook has experienced some negative publicity due to privacy concerns and other issues in the recent past, the company continues to grow in terms of revenue and active users. The stock price reached an all-time high in July of 2018 and has dropped by nearly 30% since then, but the steady rates of growth make this company one that you still might want to invest in as one of the best option stocks. Social media only continues to rise in popularity among users of all ages, which increases the need for advertising that turn your investment into a larger profit.
Disney has made major acquisitions and purchases in the last few years, making it an extremely valuable company that you may want to consider as one of the best option trades today. It recently closed its acquisition of 21st Century Fox, which was a $71 billion deal, and owns a number of other valuable assets that make it a very profitable business. Although these mergers bring some struggles, they can ultimately result in more value for the company.
Additionally, Disney announced its new streaming video service that will compete with some of the major players in this industry. When considering stocks for options trading, Disney is one to potentially purchase.
Apple is another of the best stock options for 2019. Since January 1, its value has gone up. It was also among the best stocks for options trading in 2018 as the shares were at record high prices in October. Although the value isn’t quite as high now as it was then, it has been increasing again thanks to the launch of new services and products.
The company did experience a decline in value when its CEO announced that sales in the Chinese market were slowing slightly, but some of its core offerings, including Apple Pay, the App Store, and iCloud, will continue to expand in the coming years. As a result, it’s among the best stocks for call options.
One of the most active stock options is Amazon, a major player in the national retail market. It has been expanding into other areas of business through its acquisition of Whole Foods and the launch of Amazon Web Services. The company does not shy away from looking into new ways to become more profitable, so it’s worth investing in if you don’t mind taking some risk. Amazon is one of the highly traded options because of its continuous growth and impressive P/E ratio, which competes with technology companies and other businesses that offer high returns.
Netflix, a powerful online streaming service, has made a number of changes to its business model to adapt to the needs and desires of its customer base. As a result, it has a very high price-to-earnings ratio, making it one of the best optionable stocks to trade. Some investors wonder whether the value is overinflated, which is why you may want to consider it as one of your stocks for option trading.
The value of Boeing stock dropped in March of 2019 after a crash caused global governments to ground its fleet of aircraft. However, the company has a number of other aircraft options available and experts believe that its business model is too big to fail. Many are looking to the future with an expectation that the stock value will come back from its decline, so you may want to take advantage of this by investing. Boeing is among the best stock options for trading and is an active option in the major market.
With an understanding of options trading and why it might benefit you, the choice is yours as to whether you want to pursue it as part of your overall trading strategy. At Raging Bull, we have a team of experts who can help you learn more about options trading and other methods of trading that can help you take your portfolio to the next level. Our goal is to provide you with tools and resources that allow you to become a more experienced and confident trader. These resources include webinars and e-books that are packed with the information you need.