To date, we have almost covered every component in an Options contract description. Taking the Options contract GOOG 530 Jul Call for example:

• 530 is the strike price and we have discussed “Which strike price to buy“
• Jul is the Option expiry month and we have discussed “Which month Option to buy“
• Call is a type of Options contract that we buy when we feel bullish about the underlying stock

Now we are left with GOOG :-D. In step 9 of this article, I have introduced GOOG as the stock ticker symbol for the company Google that is listed on NASDAQ stock exchange. This is merely a abbreviated name of the company for the stock exchange on which the company is listed.

Then comes the million dollar question : How to choose the right stock to buy Option on?

Let me suggest some common ways of choosing the right stock:

1. Let someone recommend to you. You can consider professional ones (that comes with a huge price tag of course) from the likes of Schaeffers Research. Alternatively, you can check out the trade recommendation services from Options trading blogs such as 1Option, Condor Options and Index Spread Options. Your broker likely will send you stock analyst reports daily. You can also choose to pick your stock from there. Personally, I have not tried any of recommendation services before. I believe in “the faster you make money from the market, the faster you will lose it too”. I am one of those people who like to learn how to fish.8)
2. Choose a few radar stocks, keep a close tab on them and lookout for trading opportunities with the radar stocks. Dr Alexandra Elder recommends to begin with tracking 20-30 stocks from the market sector that you are familiar with. For instance, perhaps you are in the IT line, you may want to start with the stocks from technology sector such as Google (GOOG), Yahoo (YHOO), e-Bay (EBAY), Apple (AAPL), Research in Motion (RIMM) etc. A senior recommends me to track stocks with high average true ranges (ATR). Since we are trading Options, we need highly volatile stocks and ATR helps to identify stocks with big prices swings most of the time. Let’s take a look at the ATR for GOOG. GOOG has a ATR that fluctuates around 8-10 daily and it is capable of making $20 movements within a day! There are many other criteria to use to select your radar stocks. The criteria may be related to your trading style or methodology, some even for personal reason (like, I simply love the company!).
3. Use a stock screener. You specify the qualities of the stocks that you are looking for and the stock screener will return you with a list of stocks that match the qualities that you have specified. With stock screeners, you don’t have fixed tickers to trade everytime. So everytime you will trade whatever stocks that your stock screener tells you to. I have found a good list of stock screeners from OptionPundit (check under the “Stock Screeners” header). Personally, I use MSN Moneycentral’s stock screener (requires Internet Explorer) heavily. There are also pre-defined stock screens available that you can use off the shelf.

Personally I feel that which way to choose stocks depends a lot on the trading system I adopt. One that fits my trading strategy, style and personality. No matter which method you choose, you should backtest it thoroughly, then paper trade with it before actually using your real money. This applies to any trading tactic, method, strategy, system etc that we plan to adopt as well. Well, any method that can help to make money consistently is a good method right?