Weekly Newsletter   Challenge account   Weekly Newsletter   

How do I select stocks for trading options?

A few of my followers and subscribers asked me the same question: “How do I evaluate stocks and select them to trade options”?

When I was relatively a novice to trading options I also didn’t know what stocks to use trading options. But the selection process is exact same as if you select stocks to trade or invest in them.

You want a strategy first. You want to know what you want to trade and how before you start trading. The strategy will help you to select the stocks and create a watch list. I did it the exact same way.
BornToSellYou can also use screeners which can help you to select stocks you want to trade. For example, if you want to trade covered calls against your dividend stocks you can use a web site Born to Sell run by Mike Scanlin. The web site provides an excellent tutorial on selling covered calls and it will also help you to evaluate stocks in your portfolio whether it makes sense to sell calls against them or not. I used the website myself. The only feature I missed was ability to link it with my broker’s account to do the evaluation automatically without manual entering of stock symbols and trades.

However, if you use a screener like the one above, you still have to do your homework. The screeners will pick everything it finds out there among 30,000 stocks. And believe me, not all stocks are made equal. Many of them will look awesome on paper, but they are actually junk.

OScreenerFor put options my friend Wayne told me about a good screener at Oscreener. It is a neat tool allowing you to screen for puts as well as other strategies such as spreads.

But again, with those screener you still have to do your homework and weed out junk selection (for example stock below $5, certain sectors – for example I do not trade pharmaceutical stocks, etc.). Some screeners like the Born to Sell ones will allow you to set them to avoid those sectors and stocks, so you need to pay attention to that.

Later, I stopped using screeners as my strategy shifted a bit to a different direction so I no longer needed them. But they were a great tool to select some good candidates for trading. For example I decided trading options against dividend paying stocks. I know those stocks and know what to expect from them (no sudden surprises). To create a list of stock candidates I use other bloggers who invest into dividend stocks to see what they buy, sell and what they think about their dividend stocks.

There is a lot of dividend investor who regularly publish their analysis and their stock buy or sells. To name a few:

DivHut – regularly posts his outlook and analysis about good dividend stocks which can provide you with a good stock candidates no matter what your strategy, be it options trading, or dividend investing. You can see his last post about dividend stock picks for February.

Dennis McCain Investing – Dennis is a mix of dividend and growth stocks, so following his blog will provide with ideas on growth stocks as well as dividend stocks. He also posts regularly his picks and his opinions on the stocks worth to review.

D4L – A great source of dividend stock analysis. I would even recommend to sign up for his newsletter. If so, you will receive his analysis to you inbox. Very valuable service and great source to build up your watch list of stock candidates.

Retire Before Dad – Another great source of stock candidates worth to look at. His stock picks will also help you to quickly build up your watch list. The good thing is, that you do not have to deal with junk stocks, but stocks other serious investors invest in.

Roadmap2Retire – another dividend growth investor who publishes his recent buys or sells as well as stock analysis and provides a plethora of good stock candidates to build up your list of stocks.

Of course, following those investors doesn’t mean to automatically and without thinking invest in their picks. Their goals and strategy may be different than yours, their risk tolerance, time horizon, all may not suite you and your investing style. Although I follow investors like those mentioned above, I write down their stock picks and later review them in detail using my criteria.

If looking for a stock to buy as a dividend income – I review them from the dividend growth income perspective and use the rules of that strategy such as dividend yield, growth, history, security of the dividend and many other metrics. If I look for a candidate to trade options against such stock, I review them from the options trading perspective – are they optionable? What premiums they pay? How volatile are they? How they trade options – high open interest, volume, etc.?

I also follow a few option traders and their blogs:

My Trader’s Journal – Alex runs his blog and posts regularly his naked put selling strategies. He also describes his strategies and potential outlook of each trade. In the past I took inspiration in his blog and followed a few trades myself. I remember a few trades against FCX or SWY which after I reviewed them I liked the output so much that I traded those stocks successfully in the past several times too.

Simply puts – another put selling trader who is posting his trades on a monthly basis and a great source of stocks for your watch list. I also got inspiration of a couple of trades at his web site, such as TEVA, LINN, or POT.

As you can see, you are not alone. Thanks to the internet, you can bundle with many investors and traders out there where you can start building your watch list and strategy. Those investors are good people and they always help if you ask them.

I started like that a few years ago by taking inspiration from them. You can do the same thing. You will be surprised how easy it would be to pick stocks you can continue building up on them review them further and make your decision whether to invest in them or trade them.

Recently, I posted my February stock picks. The watch list the screener was browsing through was created the way I just tried to describe above. I have approx. 150 stocks in it. But I will invest only in a handful of them if they present a good opportunity. But that’s a next part of the investing – trading process.

Now I hope you know how you can pick the stocks for your trading or investing. You can try it on your own and I believe you will be successful and also surprised how easy it was.

And for those of you who know all this and consider it a piece of cake, how do you or did you select your stock candidates in the past?


3 responses to “How do I select stocks for trading options?”

  1. Nice article. Option income is a big part of my overall gameplan and while there are many different strategies – straddles, strangles, iron condor, etc I like to stick to cash secured puts and covered calls

  2. Dennis says:

    Thank you for the mention. You have some very interesting links in this article and I’m looking forward to reading some of the ideas presented on those sites. I only hope their sites are as informative as yours. I learn something from almost everyone of your articles. Thanks.


    Dennis McCain

  3. Dennis says:

    Thank you for the mention. You have some very interesting links in this article and I’m looking forward to reading some of the ideas presented on those sites. I only hope their sites are as informative as yours. I learn something from almost everyone of your articles. Thanks.


    Dennis McCain

Leave a Reply

Your email address will not be published. Required fields are marked *