Even if you don’t have any intention of trading in the derivatives market, you’ll still want to consider top stocks for options trading. How come? Options provide leverage, typically in the form of 100 shares of the underlying security or asset per every one contract. You can accelerate your profits – and your losses to be sure – over a short time.
Given the “energy density” of the best options trading stocks, institutional investors – the smart money – love the derivatives market. Again, if you have zero intentions of participating, you’ll want to know what the big dogs are doing with their money. In other words, it’s financial intelligence.
Speaking of which, to decipher compelling options traders’ stock picks, I’m indebted to Fintel. Through its stock options flow screener – which exclusively filters for big block trades likely placed by institutions – I’m able to see in real time what transactions the major players are making.
If you want a sports analogy, the options flow data is the equivalent of sabermetrics. Armed with this data, I can better predict what the next pitch might be. And on that note, below are high-potential stocks for options traders.
SPDR S&P 500 ETF Trust (SPY)
I realize that this discussion centers on top stocks for options trading. However, I believe I’d be remiss if I didn’t mention the benchmark exchange-traded fund SPDR S&P 500 ETF Trust (NYSEARCA:SPY). With the SPY representing the tradable version of the S&P 500 index, it’s important to understand what the big dogs might be thinking about it. Interestingly, one trade popped up that caught my attention.
On Wednesday, an entity (or entities – we really don’t know) bought 2,886 contracts of the Feb 16 ’24 400.00 Put. For those unfamiliar with the lexicon, the date refers to the time when the contract expires. And the “400.00” refers to the strike price. Interestingly, this strike is very close to the $410.68 level that the SPY bottomed at on Oct. 27 prior to bouncing higher.
Fundamentally, it’s important to respect this put, which is why I consider it one of the “best options trading stocks.” You’re going to want to know that some of the major traders may be having concerns about the SPY.
Invesco QQQ Trust Series 1 (QQQ)
Again, I know that we’re not literally talking about top stocks for options trading. However, given that the technology sector has been the talk of town throughout this year, it’s important to understand institutional trading dynamics associated with the Invesco QQQ Trust Series 1 (NASDAQ:QQQ). In the open market, QQQ gained nearly 46% of market value. It seems the ETF will only march higher.
However, that might not be what some institutional traders believe. Notably, major entities bought 1,804 contracts of the Mar 15 ’24 355.00 Put. Interestingly, on Oct. 26, the QQQ bottomed at $343.66 before soaring higher. Still, does the tech-centric ETF have enough legs remaining to push even higher from where it stands?
Looking at fundamental data, I’m not so sure. Circumstances really haven’t improved much in the prior summer peak regarding inflation and borrowing costs. Indeed, for the latter metric, borrowing costs stand higher than in the summer. And they could rise given the stubbornly elevated inflate rate.
So, I don’t think it’s out of line that QQQ happens to be one of the options traders’ stock picks (or ETF picks, to be more accurate).
Taiwan Semiconductor (TSM)
As one of the most important semiconductor firms in the world, Taiwan Semiconductor (NYSE:TSM) will almost always attract interest. Therefore, it’s not surprising that TSM represents one of the top stocks for options trading. Since the beginning of the year, shares popped up more than 33%. In fairness, it got choppy in the summer due to broader industry headwinds. However, better times may be ahead.
According to a Bloomberg headline, TSMC – as it’s often abbreviated – saw its shares jump after posting a monthly sales gain. This latest bit of encouraging news shows that the chip industry may be in recovery mode. So, it’s not surprising that institutional investors bought significant volume of the Nov 24 ’23 105.00 Call in a bid for a short-term scalp.
In addition, some traders decided to sell puts. Basically, that’s a wager that the underlying security won’t drop below the listed strike price. In exchange, the trader receives a premium for underwriting the risk. For an important enterprise like TSMC, I believe that’s a reasonable bet because if things go sour, you’re buying TSM at a price you’re comfortable with.
Lyft (LYFT)
When it comes to high-potential stocks for options investors, the likely assumption is to go long the security. But when it comes to derivatives market trading, you can short an enterprise by “going long” its underlying put contracts. That would give you the right (but not the obligation) to sell the underlying security at the listed strike price. Ride-sharing firm Lyft (NASDAQ:LYFT) might provide the negative fireworks.
Right now, a major entity is taking a huge risk by buying 2,182 contracts of the Nov 17 ’23 10.50 Put. That’s quite a gamble (assuming it’s not part of a complex multi-tiered strategy) not only because of the near-expiry wager but also that Lyft beat expectations for its third quarter. Still, the bears might not be wrong about this.
On Tuesday, institutional traders piled into the bought puts; specifically, acquiring 6,583 contracts of the Feb 16 ’24 10.00 Put. Fundamentally, fading revenge travel sentiments – remember, inflation is still elevated against historical norms – may crimp mobility. In turn, that could negatively impact ride-sharing platforms.
So, it might be one of the top stocks for options trading, just not in the northbound direction.
Cameco (CCJ)
While not the most exciting idea among top stocks for options trading, nuclear energy specialist Cameco (NYSE:CCJ) presents a relevant backdrop because of its core business. True, the underlying uranium asset presents controversies due to the terrible consequences if circumstances go awry. However, outside of extraordinary events, nuclear energy is clean and safe. As well, nothing quite commands the energy density of nuclear fuel.
Therefore, it’s not surprising that options traders are generally bullish on CCJ. Specifically, on Wednesday, major traders sold (wrote) 995 contracts of the Mar 15 ’24 26.00 Put. Given the lowly strike price – CCJ closed that day at $43.17 – it’s doubtful that shares will drop to that point. Therefore, whatever premium collected on the trade should be relatively safe.
Indeed, I’d go so far as to say that you can write puts at a higher strike price – let’s say even up to $35 – and still do well. This is one of the best options trading stocks because the relevancy of the idea makes selling puts palatable.
Notably, analysts rate CCJ a unanimous strong buy with a $50.30 price target, implying almost 17% upside.
Citigroup (C)
As a major financial institution, it may be difficult to be bearish against Citigroup (NYSE:C) for an extended period. At least, that’s the lesson pessimists are discovering about the enterprise. True, C stock is down about 2% for the year. However, in the trailing five sessions, Citi shares popped up almost 7%. Does that make it one of the top stocks for options trading?
Per Fintel, the answer may be “yes” but perhaps not for the reason you’re thinking. One of the biggest trades in terms of the premium engaged – we’re talking 11.96 standard deviations above the median – stems from Citi shares. Specifically, major entities sold 10,118 contracts of the Jan 19 ’24 42.50 Call. Subsequently, they collected $1.85 million in premium.
That’s a huge bet because as of the moment – with shares closing at $44.88 on Wednesday – the call option is in the money (ITM) for buyers. So, the call seller must have confidence that shares will fall. Given the troubles the company incurred along with aforementioned broader economic challenges, a bearish wager might not be out of the question.
JD.com (JD)
Since the start of the year, shares of JD.com (NASDAQ:JD) – a powerhouse in China’s e-commerce ecosystem – stumbled badly. We’re talking about a half-off haircut in market value. Yes, that might be a screaming deal for top stocks for options trading. However, sometimes a deal is too good to be true. Could that be the case for JD stock?
Surely, anything is possible so I don’t want to discount the risk involved. Nevertheless, I also couldn’t help but notice that major entities bought a significant amount of JD call options, both with near term and longer-term expiration dates. In fairness, other traders are either betting against shares with sold calls or the same traders are mitigating their risk.
With China’s economic dynamics questionable to say the least, the apprehension is understandable. Still, JD popped up 9% in the trailing five sessions. Fundamentally, the e-commerce stalwart posted earnings and revenue that exceeded analysts’ expectations. So, the optimism aligns with a reasonable thesis.
Finally, analysts rate JD a moderate buy with a $44.34 average price target, projecting 55% growth.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.