Trade stock options according to (ONLY) volume?

Question

I am only used to buying stock options that are either FAR out in expiration or have LOW TRADING VOLUME. I know that expiration date is vital for any option. Lately i have been watching the Yahoo! Options Most Actives under High Volume and Unusually High Volume.stock options. I have never owned one with open interest in the 10,000-150,000 (or higher) range. Many stock options like Microsoft, Intel, Bank of America, Citibank, and others trade daily and weekly in high volumes as OPTIONS. Many of these options also have affordable prices-in single and double digits. They also have DAILY RANGES of 10%-15% in many cases. My experience is with the options that have the LOWEST Volumes and trade infrequently (sometimes weeks). Do the mentioned options really trade on a daily basis? In this price range? Can these be profitable in the SHORT TERM? Thanks

Answer 1

Options with high volumes are more likely to be profitable in the short term because the price you pay/receive is much more likely to be close to the true value. If that many market makers are watching the stock then the difference between the bid and ask is likely to be small. On the other hand, options with very small volume or a long time to expiration are likely to be watched by very few market makers.

Answer 2

Options w/ higher volumes tend not only to be more liquid, but tend to track closer to the underlying stock price's movement. Just because an option doesn't have much open interest doesn't mean it's better / worse than one that has a high open interest per se.

There are other factors to consider as well, but if you're just trading something thinking that it's volatile just because its volume is low, then you might not be understanding quite how options are priced.

If it's daily volatility that you're looking for, first find a stock that had a volatility to your liking. Many brokerages have good scans for that. Then, once you do that, screen out stocks with at least 250,000 or 500,000 shares traded in a day (since you probably want somethng that's somewhat easy to get in/out of without "tipping" the market maker too much.

Then, find the options that are to your liking. If you're the only market (open interest 5 for example), then you're probably not going to get a great deal entering or exiting, but if the open interest is over 100 or so, you might be ok.

For these stocks/options, you should find a better correlation between the stock movement and the option movement.

At some point (preferably sooner rather than later), you'll also want to take into account Vega (the component of the option price related to implied volatility). For example, today, the IV is very high on GOOG. By tomorrow, the IV will drop significantly, as will the ATM option price. that's the power of vega.

Hopefully this answers your question and gives you some stuff to chew on. .Take care!

Answer 3

I am a member of Financial Destination Inc. or (FDI) and they have a gentleman by the name of Charles Sachs that is one of the top stock options strategist in the world. He targets trades at 5-20% per trade. He has profited 137.6% in the past 23 months with his newsletter. Charles also does a weekly calls to explain how the market is trading and what his strategies reflect on conservative projections at high return. Has done remarkebly well for me. I f you have questions my email is on my personal membership site.

www.fdirep.com/vip


Tyson

Answer 4

you can only buy as many call options as the sellers are willing to write but there is no hard limit not even the shares outstanding because the contract is settled between you and the options exchange with a simple transfer of funds that does not involve the underlying shares at all. for example if you buy options with a strike price of $13 and at expiration the price is $14, the writer of the option will give you $1 per per share specified the contract and close out the contract. shares do not change hands.