I'm often asked what are the best stocks for trading and hedging. As I've written and spoken about before, if stocks don't have the ability to move on a day to day, week to week to basis, then why bother owning them? It is this movement, both up and down, that generate the opportunities to adjust the collar trade.


The only way PRICE will change for a stock is if it moves. And unfortunately, if your crystal ball is broken, that includes pricing moving UP and DOWN.

However, I get it. You want to own a stock to appreciate in price, but not have any of the downside risks. So you can choose from stocks that will pay you to wait (for it to eventually move) in the form of a dividend. But really, how smart is that? You get paid a tiny percentage and take on huge risk in the event your stock begins to "burn down". Don't think that can happen, just look at a recent chart of German car maker Volkswagen (ticker: VOW:GR).

Take a stock like AAPL which currently pays about a 2.2% annual dividend and is trading around $100. The daily movement in AAPL is often over 2pts which means you can gain or lose the equivalent of the dividend each day! There is no way that a dividend alone will be able to compensate for even a moderate drop in stock price, let alone a sustained move downward.

Really, what you are looking at here is VOLATILITY. And stock movement coupled with options represents opportunity.

Now there is room to do homework here. You don't want to get into stocks that constantly decline because the underlying business is in trouble and they are going extinct (and in reality you don't want one that going straight to the moon either). A strongly downward moving stock will end up losing money, even if hedged. A stock moving upward in a straight line also does not work well with a collar as price will overrun to the upside.

What you want are stocks that have a significant movement both UP and DOWN over periods time, are a generally strong and in a viable business.  Find a stocks that move in accordance with its business cycles. These are ones to focus on.


What is liquidity and why is it important? Think of it this way, you might be a collector or rare blue Garden Gnomes. You might find one worth $1000 and think, hey that's a deal. Eventually, however, you might want to get your $1000 (or whatever you think its worth) back. How are you going to do that?

Good question. You need to find a Gnome dealer and one who specializes in blue ones. What if you cant' find one nearby, they you need to look farther or get more creative about your selling. Someone might be interested, but since not many people buy and sell these Gnomes, they might offer you a very different price.

What you are experiencing is a liquidity trap. You have something that you think is valuable but can't find a buyer if you are a seller because there is no market. The same thing can happen with stock and with options.

When you purchase a hedge for your stock, you want to make sure you pay a fair price and that you can sell your hedge when you needed. If the options are priced unfairly or there are no buyers when you need to be a seller, that's a liquidity trap.

Fortunately, you can quickly determine the degree of liquidity in your options.

When you find a stock that has a good degree of volatility both up and down and has a very liquid options market, you have found a prime candidate for trading a stock collar.

2016 Watchlist

These are some of the candidates that I like due to their high liquidity in both stock and options, and overall movement. Fundamentals depend on the current business cycle. Each will cycle through periods upwards and downwards. I leave that for you to do your own homework to decide on whether to enter a position.

I have divided them in to under $50/share, under $100/share, and over $100/share for those with differing amounts of capital.

This list will change from time to time, but these stocks tend to be part of major indexes and have significant capitalization.

Under $50 / share
AAL - American Airlines (1pt option strikes, 0.10-0.15 bid-ask)
USO - US Oil Fund ETF (0.50 option strikes, <0.5 bid-ask)

$50-$100 / share
AAPL - Apple (1 option strikes, <0.05 bid-ask)
QQQ - Powershares QQQ NASDAQ-100 Index Tracking (0.50 option strikes, <0.05 bid-ask)
CAT - Catapillar (0.50 option strikes, 0.10-0.20 bid-ask)
FB - Facebook (1 and 0.50 option strikes, 0.10 bid-ask)
NFLX - Netflix (1 option strikes, 0.20-0.25 bid-ask, high premium)
BABA - Alibaba (0.50pt strikes, 0.10-0.15 bid-ask)
NKE - Nike (1pt strikes, wide 0.20 bid-ask option strikes)
AXP - American Express (0.50 option strikes, 0.10 bid-ask)

Over $100 / share

SPY - SPDR 500 ETF Index Tracking (0.50 option strikes, 0.05-0.10 bid-ask)
MCD - MacDonalds Corp (1 option strikes, 0.15 bid-ask)
HD - Home Depot (1 option strikes, 0.20 bid-ask)