Criterias to list stock options – Option Trading FAQ

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Criterias to list stock options

Q: Why do some stocks have options for trading while others don’t?

A: To have options on their stock traded on options exchanges, companies must meet the following criterias.

  1. The company must have a mimimum of 7,000,000 publicly held shares outstanding.
  2. The stock must be listed on the NYSE, Nasdaq, AMEX or any national stock exchange..
  3. For the past 5 trading days, the closing price of the stock must have a minimum per share price for a majority of trading days. This means that IPO issues cannot have options traded on them until 5 days after the initial public offering date.
  4. There must be at least 2,000 shareholders in the company.

Option exchanges will not allow any option to be traded for a particular stock if the company fail to meet any of the above criteria.

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Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results. [Read on. ]

Writing Puts to Purchase Stocks

If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount. [Read on. ]

What are Binary Options and How to Trade Them?

Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time. [Read on. ]

Investing in Growth Stocks using LEAPS® options

If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPS® and why I consider them to be a great option for investing in the next Microsoft®. [Read on. ]

Effect of Dividends on Option Pricing

Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. [Read on. ]

Bull Call Spread: An Alternative to the Covered Call

As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative. [Read on. ]

Dividend Capture using Covered Calls

Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. [Read on. ]

Leverage using Calls, Not Margin Calls

To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. [Read on. ]

Day Trading using Options

Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading. [Read on. ]

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What is the Put Call Ratio and How to Use It

Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator. [Read on. ]

Understanding Put-Call Parity

Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. [Read on. ]

Understanding the Greeks

In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as “the greeks”. [Read on. ]

Valuing Common Stock using Discounted Cash Flow Analysis

Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow. [Read on. ]

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Top Five Stock Criteria for Options Trading

By all accounts, activity in Options continues to grow. Not only are Options escaping their “niche” stature as a derivative instrument due to broader exposure via media advertising, but their use is also growing due to necessity . For the average retail stock trader, many of today’s popular stocks are far too expensive to purchase. Want to buy 100 shares of GOOGL? Prepare to part with over $70,000 of your capital. Ditto for AMZN. Even buying shares of the S&P500 ETF SPY will cost you nearly $21,000 for 100 shares.

And this is precisely why retail investors are flocking to Options trading to more efficiently utilize their capital, as well as create cash-flow strategies with much lower capital requirements.

But WHICH stocks? Most stock traders are already familiar with the daunting process of evaluating stock fundamentals to find those candidates that have the strongest growth potential, but that is just the beginning of the process when it comes to finding a good stock candidate to trade options on; some are better for options trading than others are. What specific criteria makes a stock “better” for successful options trading? Let’s take a look:

It might surprise you that not all stocks have derivative options; in fact, only about half of the available tradable US equities have listed options. As of this writing, a quick scan of the NASDAQ and NYSE exchanges shows that there is just shy of 5,000 stocks in the US market that have listed options. As we’ll see, we’re not going to trade all 5,000 of these; only a small subset of these give us the edge that options traders desire. Our number one criteria, therefore, is that our candidate stocks be “Optionable.”

2) Open Interest/Volume

Another new concept for stock traders to learn once they start to trade options….is that every option at every strike price has its own “market” with a bid and ask price, as well as associated trading volume. In the options chain listed below in Figure 1, you can see how each call option has its own daily trading volume of contracts, as well as “open interest,” which represents contracts that are currently being held.

In this particular case, there is NO volume for the calls on this stock, and the open interest with 14 calendar days left is either non-existent, or extremely low. Because of these low numbers, liquidity for these options is terrible. Note how wide the bid/ask spread is of these options, such as the 17.5 strike calls: $1.55 bid by $3.40 offer. That is a HUGE amount of edge to surrender by playing this stock.

Because of these effects, our second criteria for an optionable stock is that the Open Interest be at least in the “hundreds of contracts” scale in the near-term options. Options than are further out in time will, as a matter of course, offer less Open Interest.

Not unlike that with stocks, traders will have the best success with very narrow spreads between the bid and the ask price of the options. In Figure 2 below, you can clearly see how the option chain below shows an extremely liquid instrument with bid-ask spreads about a penny wide….and much of this is due to the heavy volume and open interest:

Heavy open interest should drive tight bid/ask spreads, but not always….times of heavy volatility can “widen” the bid/ask spreads. Ensure that any stock that you are trading with options has the narrowest bid/ask spread possible.

4) Strike Price Granularity

This is less of an important criteria if you are starting out by just buying “long call options,” but sooner or later, you will gravitate towards safer and higher-probability “spread” strategies. And when you do, you will want to “fine tune” your spread positions by not only location on the options chain, but also by the width of the spread itself, being the difference between the strike prices. With most retail traders learning on smaller accounts, this takes more precedence that you are able to fine-tune the position risk to meet the capital requirements of your account.

Compare the strike price “granularity” between the chains in Figure 1 and Figure 2 above; clearly the chain in Figure 2 offers much more granularity of strike price offerings, increasing its flexibility to be used with any-sized account.

5) Weekly Options

All optionable stocks offer “monthly” expirations, which are typically the Saturday following the third Friday of the month. This is how options were first offered back in the 1970’s. Beginning in about the 2005 timeframe, however, option cycles offering Weekly expirations began to be offered, and are now enormously popular amongst active traders. Because of this popularity, stocks offering Weekly options usually (but not always) display ALL of the characteristics that we’ve looked for up to this point, which include listed options, open interest/volume, tight spreads, and good granularity. As of this writing, there are 436 available stocks that offer Weekly options, or about 9% of the available optionable stocks. Your best opportunity for a consistent, profitable experience is therefore with a stock featuring listed Weekly options.

The average retail stock trader who migrates over to trading options….will usually go through this learning cycle before they learn how important LIQUIDITY is to options trading success. There is no more frustrating experience than to get everything else correct on a trade setup, but being unable to exit the trade for your earned profit because there is no one else on the “other side” of that option to let you to close the trade.
At TheoTrade, we insist on strong liquidity before we trade any options, and offer all of our members a “scrubbed” watchlist of highly liquid stocks that meet all five of our required criteria.

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