How to Find the Best Stocks for Options Trading

Breaking down how options trading differs from stock trading

Senior Quantitative Analyst
Mar 9, 2022 at 8:00 AM
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Our focus at Schaeffer’s is options trading. Even though an options contract’s value is based off of the underlying stock's price, a skilled stock picker is not always a profitable options trader.

The main difference is that options have expiration dates. An options trader, therefore, not only has to be right on the direction, but they must also nail the timing. Strike prices and implied volatilities are two other factors an options trader must consider that stock traders don’t deal with.

Ultimately, impressive stock returns do not translate into great options trades. This week, I will provide examples of when stock and options returns diverged, and share a tool we use to find the best stocks for trading options. I will also provide a lists of stocks which have been the best for options trading over the past year.

Options vs. Stock Trading: An Example

The chart below shows the return over the past year for Microsoft (MSFT) and NetApp (NTAP). A stock investor would have done slightly better with NTAP (+22%) than MSFT (+19%), but options traders could have had very different experiences.

past year return

Let’s look at short-term call options trades on these two stocks. To do this, I looked back at the past year and found every day there was an option that was exactly at-the-money and expired in 21 trading days, or about one month. To price the hypothetical options, I looked at options implied volatilities on these stocks for options that were closest to at-the-money and one month away from expiration.

MSFT and NTAP were both up about 20% over the 12-month time period analyzed. The table below summarizes how short-term call trades performed it that same period. MSFT call traders averaged a gain of 45.6% per trade, but NTAP call traders averaged a loss of 18.4%.

Even though the stocks gave the same returns, MSFT call options traders would have massively outperformed options traders for NTAP. One reason for this is that MSFT had a lower implied volatility than NTAP (23.5% vs. 36%). This means that if both of these stocks move up the same amount, the options on MSFT will be more profitable than NTAP.

summary of call options returns

Finding Stocks to Trade Options

At Schaeffer’s, we created a tool for finding the stocks which have been best for options traders, or stocks with underpriced options. We call it the Schaeffer’s Volatility Scorecard (SVS).

The thrust of the calculation is like the analysis above, except instead of looking at how hypothetical call options performed, we also assumed the purchase of a put option. This gives us returns of hypothetical straddles over the past year which profit from big moves in either direction.

We consider the average return and consistency of positive trades among other things from these hypothetical straddles to come up with a single number that we call the SVS. The SVS ranges from 0 to 100. Below are some lists of stocks using data from the SVS calculations.

I filtered down all these lists to only stocks with ample options liquidity. First are the 20 stocks with the highest SVS. These are stocks with underpriced options over the past year.

The last column is the percentage of hypothetical straddle returns that were positive because of the call option, or because the stock price increased. The higher the value probably means the more bullish the stock did.

One thing that I did not mention is that we also consider how cheap options are currently priced compared to the last year. That is why stocks with straddles that did not perform as well still might be ranked above stocks with straddles that performed better.

stocks with highest svs

Below is a list of stocks that have a high SVS (at least 85), and had the highest percentage of positive returns due to the call options. For this list, I eliminated the oil, gas, and coal sector, which dominated the list because of the nature of that sector over the past year. This is a handy list for bulls looking for stocks to trade options on.

bullish stocks with high svs

For the options bears, here’s a list of stocks with a high SVS that have been profitable mostly due to the stock falling.

bearish stocks with high svs



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