Lesson Overview

Scanning for the Best Stocks & Trading Setups

Need help scanning for the best stocks and trading setups? In today's short video I'll show you the two things I'm always looking for when I go out looking for trades and how our new Watch List software that we built helps cut our scanning time by 10X because we can filter and rank trades by implied volatility.

Show Video Transcript +

In this video, we're going to go through my process for scanning for the best stocks and setups to trade. First, I'm going to assume that before scanning, you already have a good idea of your portfolio balance, or your beta weight, from previous video tutorials here at Option Alpha.

In addition to that, I'll obviously assume that you've pre-screened your watch list for great liquidity because you want to minimize that slippage that can come with trading options and stocks with really wide spreads.

Because the reality is that scanning for the best setups is very easy once you know exactly what you're looking for.

It's all about finding the low hanging fruit. Just to go back a slide here a second, once you know what your portfolio balance is, meaning that if your portfolio is a little bullish or bearish, or maybe it's exactly neutral, then it's a lot easier to go looking for new trades, because now you've got an idea of what can help you get more balance or more neutrality in your portfolio overall.

Here are two things to keep in mind, and again this all revolves around the low hanging fruit. We'll do some scanning right now on this video at the time that we're recording this.

Two things you want to keep in mind are number one, high implied volatility is our edge, so if you're going to focus on anything that you do as far as scanning, something like high implied volatility has to be at the center point of how you quickly find trades.

In my opinion, when I go looking for trades every day, the first thing that I'm looking for is what stocks or ETFs have high implied volatility that creates an opportunity for me to get on another trade. Again, that's because that's our edge as options traders.

Number two is that we have to keep in mind the direction relative to portfolio needs, which means that at the end of the day, as we've proved before in videos, you can make a trade in any direction with options and have the same probability of success and have relatively the same premium or profit potential based on risk in any direction.

Bullish, bearish, or neutral. What you have to keep in mind is that if you're going to make a directional trade, you have to make sure that it fits well into your overall portfolio.

It's asking you the question ahead of time, "If I already have let's say 10 bullish trades, do I need to go looking for another bullish trade? Or can I go out looking for a bearish trade?" Something like that.

That's what you need to start asking yourself. I could keep those two things in mind. What we've done here at Option Alpha is made the entire process for scanning for trades insanely simple and hopefully given you the tools that save time and help you make smarter decisions a lot quicker.

Inside of our watch list, we're got a lot of different things that we pre-built in based on the feedback from hundreds and thousands of members on what would help them scan for trades easier and figure out what types of strategies to use.

When I go in here every single day, again like I said, one of the things that you can do is you can automatically scan and look by high implied volatility. You can go right into the watch list and sort the entire list and filter out anything that doesn't have high implied volatility.

Again for me, this is the first thing that I do is I want to see which stocks and options have the highest implied volatility. Once I filter out just those with implied volatility over the 50th rank or percentile, then I can sort that list highest implied volatility to lowest.

Now I can see here on this list that EWZ could be a possible trading opportunity for me, or PBR, or MON, etc., etc., etc. now I can go in here and say these are the things I need to be focusing on because they have the highest implied volatility, the highest opportunity for me to make money.

One of the things that we also pre-built in here is the ability to then look for the best options strategies, or the best options strategies are then suggested based on implied volatility.

You can see here for EWZ that based on this implied volatility being in the 85th rank, that we can look to trade straddles, strangles, and iron butterflies.

If we were looking at something maybe a little bit different like we're looking at, let's say Yahoo, which is implied volatility in the 63rd rank. You can see that the system automatically recognizes that, and suggests that you should trade either credit spreads, butterflies or iron condors in this case.

Again, very easy for you to come in here every single day and scan through this watch list in three clicks or less and find everything that you need to find as far as potential high implied volatility trades.

Let's say that you don't care about implied volatility for some reason, so we're going to take off the high implied volatility, we're going to go and filter on just ETFs.

Now we're going to take out all possible stocks, all possible earnings out there, we're just going to look at only ETFs. Another way that you can look for possible trading candidates is looking for stocks that have made a high percentage move in the last day.

That's another way that you can look for possible candidates is things that have moved higher or moved lower. Again, back to the slides that we had before asking yourself the direction about portfolio needs.

If your portfolio needs to find a bearish trade, it might be helpful to come in here and see which ETFs are moving down hard right now. Which might ETFs continue to move down in the future?

You might come in here and look and see that XLF has moved down about 85 basis points in the last day, so that might be a good candidate for you to then continue to trade bearish.

Again, based on implied volatility rank, the system automatically recognizes that if you're going to trade XLF, that you should be doing it with a calendar spread or ratio spread or a debit spread. Again, it's a very easy intuitive way for you to come in here and start scanning for trades. There's a million ways that you can obviously scan for trades.

We're not saying that this is the only way to do it, but again, it doesn't matter which direction you end up trading something as long as your portfolio's overall neutral, and in our opinion I think you should be trading a lot more short premium strategies, because that's where the numbers are, that's where the math is, and that's why we can constantly basically give you these tools here at Option Alpha to quickly scan and filter for the trades and ETFs and stocks that basically fit best for your portfolio.

Once you've found some candidates to possibly trade, it's time to select which strategy works best for that IV rank and the directional assumption which we'll cover in the next set of videos.

In fact, we've already kind of covered it here, but we'll go a little bit deeper into strategy selection so that you understand exactly why our system automatically suggests the best strategies based on different implied volatility rank levels.

Again, thank you so much for watching this video, if you have any comments, questions or feedback, or if you love this video and want to share it online, please help us spread the word about what we're trying to do here at Option Alpha, and until next time, happy trading.

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