The 7 Things to Consider When Screening Stocks for Trading Options

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Contributor, Benzinga
October 15, 2023

Retail options trading exploded in 2020 as stimulus money flooded into the bank accounts of many retail investors stuck at home with little to do. As a result, certain stocks (especially the tech sector and meme stocks) saw massive gains, and options trading became a way to potentially leverage large profits with relatively minimal capital input.

However, rising interest rates reversed many of the gains certain stocks enjoyed throughout 2020 and 2021. Today, investors need to do more than buy out-of-the-money (OTM) calls on their favorite stocks. Selecting stocks for options trading requires research, strategy, market knowledge and the right platform to plan your trades.

The Importance of Being Strategic in Screening Stocks 

Learning how to screen stocks for options trading is crucial for investors interested in derivatives. The days of piling into short-dated OTM call options are over as easy money policy fades and interest rates rise. Options trading isn’t a set-it-and-forget-it endeavor — you’ll need to formulate a strategy based on market conditions and individual preferences.

How do you choose a strategy for options trading? First, you’ll need to develop a trading plan and set investment parameters. Investors with different goals and risk tolerances will use varied options investing techniques. For example, are you speculating for outsized gains or hedging positions you already own? Answering these questions is the key to finding suitable securities to trade.

What to Consider When Screening Stocks for Options Trading

The following is a seven-step process for determining how to screen stocks for options trading based on objectives, risk tolerance and individual stock analysis.

1. Determine Investment Objectives

Every investment should start with a clear understanding of objectives. Why are you looking to trade options? Are you bearish on some holdings and want to hedge downside risk? Are you expecting a significant upswing in stock prices and adding leverage to your trades? Is your time horizon short-term or long-term? The answers to these questions will determine the path of your options trading strategy.

2. Understand Your Risk Tolerance

Options trading usually isn’t for the risk-averse, especially if your objective is speculation. But options aren’t just for bold day traders. Many options strategies are specifically designed for conservative investors who want to hedge risk or potentially earn income through premiums. Understanding your risk tolerance will help eliminate techniques that don’t fit your objectives.

3. Learn About Volatility and Market News

Stock volatility generally comes from two sources: economic events and data (such as a change in the Fed Funds rate) or stock-specific news like catalysts or conference calls. When trading options, two key stats to understand are implied volatility (IV) and open interest (OI), the former which measures the market’s anticipation of stock price movements. IV is a crucial factor in option pricing models.

4. Use Fundamental and Technical Analysis

Stock analysts use two contrasting schools of thought — fundamental analysis and technical analysis.

Fundamental Analysis

Fundamental analysis examines hard business data like revenue growth, gross margins and price-to-earnings ratios. Using fundamental analysis may guide investors toward stocks with outsized growth potential or stocks undervalued by the market.

Technical Analysis

Technical analysis is less concerned with balance sheets and more with stock charts. Investors using technical analysis are looking for signals to enter trades, such as trend reversal or continuation patterns. Using technical analysis properly requires an understanding of concepts like support and resistance and oscillators like the relative strength index (RSI) or the moving average convergence/divergence (MACD).

5. Come Up with a Strategy

Once you have a set of objectives based on risk tolerance and know how to screen stocks for options trading, you can develop a strategy. Investors use options in many different ways — downside protection (protective puts), speculation (OTM calls) or income production (covered calls). Pick a technique that fits your goals and trading parameters.

6. Screen Your Stocks Through Your Platform

Most platforms have their own in-house screeners, or you can use a third party like Benzinga to screen for ideal stocks. If using fundamental analysis, consider screening for stocks using factors like earnings growth or dividend growth. If using technical analysis, consider screening for stocks based on their proximity to support or resistance levels (i.e., the 50-day moving average).

7. Evaluate Results Through a Journal

The best options traders keep records and details of their investments in a trading journal. A journal is a great way to track wins and losses and which strategies worked best in specific markets. With a journal, you can review your trades and determine your strengths and weaknesses as an investor. No one has a 100% success rate in investing, especially when using derivatives like options. Figure out what you do best and stick with it.

Example of Choosing an Option

Here’s a scenario — an investor owns 100 shares of Amazon Inc. (NASDAQ: AMZN) but expects the stock to trade flat in the short term. Choppy markets are generally unattractive to many investors, but options trading can potentially help make this market profitable.

In this specific scenario, the investor can use a covered call strategy where they write (or sell) a short-dated AMZN call option with a strike price near the money. If the stock price stays flat or declines, the option will remain below the strike price and expire worthless, allowing the investor to pocket the premium and mitigate some of the loss in the equity position. 

If the stock price rises and hits the strike, the buyer can exercise the option, and the investor’s equity position will be called away, closing out the trade entirely but still allowing the investor to pocket the premium.

Of course, most trades have downside potential, especially when volatile derivatives like options are used. If AMZN has a blowout earnings report and the stock price rises significantly after hours, the option buyer might exercise their call and pull away your shares which have now dramatically increased in value. In this scenario, you’re left only with the option premium and the difference between the strike price and the stock purchase price as profit while the shares you previously owned appreciates in value in someone else’s brokerage account. 

Your Values and Mindset as an Investor Will Determine Your Options Strategy

Options can be traded successfully by bullish and bearish investors. The key is to devise investment goals, assess risk tolerance and execute a strategy based on predetermined parameters. Options trading is difficult to pull off without careful planning, so proper screening is necessary. It doesn’t hurt to practice some of your more complex trades on a paper money simulator first. With the right tools and practice, options trading may be a strategy to consider adding to your trading arsenal.

Frequently Asked Questions


How do you analyze data for options trading?


Options traders tend to use fundamental analysis or technical analysis when entering positions. Your choice of analysis style will determine the type of data you screen for.


What is the best screener for options?


Every investor will have their own preferences for stock screeners depending on the type of data they’re seeking. Likewise, every platform’s screener has pros and cons, so sample a few until you find one that pulls the ideal stocks for your trading.


Which stocks are best for options trading?


It depends on the type of options strategy you seek to execute. For example, range-bound stocks generally make more sense for income strategies like covered calls or cash-secured puts, while volatile stocks generally make more sense for options traders with more speculative mindsets.

Dan Schmidt

About Dan Schmidt

Dan Schmidt is a finance writer passionate about helping readers understand how assets and markets work. He has over six years of writing experience, focused on stocks. His work has been published by Vanguard, Capital One, PenFed Credit Union, MarketBeat, and Fora Financial. Dan lives in Bucks County, PA with his wife and enjoys summers at Citizens Bank Park cheering on the Phillies.