Welcome to our Options Trading Tutorial. Options trading is all about understanding leverage and trying to get the highest return investments to pay out in the shortest amount of time. You'll find that in this tutorial we delve into other related topics where leverage is important in order to improve your understanding of why options trading in most cases offers a better trading experience than other forms of trading.

Find out more about:
Options Trading Basics | Call Options | Put Options | Carry Trade | Inflation Investments | Option Brokers | Making Money on Options
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Sunday, May 16, 2010

Most Profitable Stock Picking System

The most profitable stock picking system for a retail trader like you and me is going to involve finding stocks that move.  The beauty of the life of the options trader is that we don't care which direction the movement comes (so long as we forecast it correctly).  We are much more concerned with the size and frequency of movement instead (unless you are trading binary options, which only require the direction of movement to be correct).

How Do I Pick Stocks That Have Big Movement

Although it really isn't all that helpful for it's originally intended purpose as a measure of risk for making efficient portfolios, Beta is a well established statistic which describes the variability of a stock relative to the broader stock market.  That being said, doesn't it seem that using beta might suit our needs for finding stocks of high variability?

Why Beta Still Matters to the Cash Options Trading Investor

Even though beta has been more or less written off as a measure of portfolio risk, resigned to the dust bin of efficient portfolio design, to the options trader it measures (historically) EXACTLY the metric the retail options investor is looking for: volatility.  Beta, simply stated, measures the historical variation in a stock relative to the broader market.  For example, a stock with a Beta of 2.0 would be expected to move twice as far as the broader market on any given day.  Similarly, a stock with a Beta of 0.5 would be expected to move 50% as far as the broader market in a given day.

So What Sort of Beta Should A Good Options Trader Select?

Oddly enough, the most profitable stock picking system for the retail options trading investor would be (drum roll please): stocks with a relatively high beta.  A stock which moves a higher percentage relative to the market is likely to have greater swings in options pricing.  Greater swings in options pricing inevitably opens the door for a small cash options investor to capture a significant portion of those swings (incidentally, the short seller of options prefers to trade in low Beta stocks... because those stocks are less likely to move, allowing the holder of the short seller's contracts to expire out of the money - so the short seller gets to keep the premium for themselves... but thats a topic for another day).  The point is that stocks with larger percentage swings on a daily, weekly, monthly, etc. basis will likely have a greater probability of providing profitable entry and exit points for options trading.

The Most Profitable Stock Picking System Involves More Than Just Beta

Finding the most profitable stock picking system for options trading isn't just about Beta, and we'll talk more about that later.  What I hope I have accomplished here is getting you (as a cash options trading investor) to stop thinking about trying o find "stocks that are going up" and instead turn your attention to a more profitable enterprise: finding stocks that are "going to MOVE"