Successful trading STARTS with having the RIGHT strategies (go here and I’ll reveal my top five simple income strategies).
Yet even the best strategies won’t work if you’re trading the WRONG stocks and ETFs.
In the early 1900s, you could’ve been the best jockey and had the fastest horse. Yet you’d lose a race against a Model T Ford.
Why? Because a horse ̶ even a very fast horse ̶ can only run 25 to 30 miles per hour . . . whereas the Model T tops out at 45 MPH. A horse just isn’t in the same league as a car.
The same is true in trading. You’re going to LOSE if you’re trading the wrong stocks and ETFs.
The foundation for ALL of my options strategies starts with a watchlist of highly liquid, optionable ETFs and stocks.
Efficiency is a key factor to successful trading. Winning over the long term requires using ONLY liquid options. Anything else will jeopardize even the best strategies.
You must trade highly liquid, optionable ETFs and stocks BECAUSE you want price efficiency on your side.
Options volume can vary dramatically between underlying assets (ETFs or stocks). Just think about the volume difference between a stock like Apple (NASDAQ: AAPL) and a small-cap stock like Spectrum Pharmaceuticals (NASDAQ: SPPI).
If the volume isn’t there, you will have a very wide bid-ask spread. A wide bid-ask spread leads to what’s known as slippage. Slippage makes getting the best price difficult. It could possibly mean having to pay 5% to 15% extra for the illiquidity. Just think about how much money that would equate to over one year.
Let’s look at an example.
The SPDR S&P 500 ETF (SPY) is one of the most heavily traded ETFs. It shows what I like to see in a bid-ask spread. As you can see below, at each strike for both the calls and puts the bid-ask spread is at most $0.03 wide. Ideally, that’s what you want to see.
Why is this important? Because if you buy at the ask and sell at the bid (or vice versa), you only have to make up at most $0.03, or 1.1%, on an option priced at $2.63-$2.66.
Let’s say that the bid-ask spread was $0.25 wide on that same option costing $263-$2.66. Even though I would suggest setting a limit price in between the bid-ask, you would still have to make up $0.125 or roughly 5%. And that’s the best-case scenario.
In many cases the bid-ask spread is upwards of $0.50 or more.
Think about it. Do you want to make an investment where you’re starting out down 5%, 10% or even 20%?
I’ve seen lots of folks trade tiny and exotic ETFs, or options on thinly traded small-cap stocks. And I’ll tell you, I’ve never seen someone do this with any long-lasting success.
Here are the top 10 ETFs and stocks for trading options:
- SPDR S&P 500 ETF Trust (SPY)
- Powershares QQQ Trust (QQQ)
- iShares Russell 2000 ETF (IWM)
- SPDR Gold Trust (GLD)
- Apple (AAPL)
- Facebook (FB)
- Dow Jones Industrial ETF (DIA)
- SPDR Energy Trust (XLE)
- SPDR Consumer Discretionary (XLY)
- Netflix (NFLX)
This list of top 10 ETFs and stocks is a great starting point for trading. Inside my FREE Options Boot Camp, I’m going to share 30 to 40 additional stocks and ETFs that I like to trade.