How you can create a specialized options trading watchlist - and why you need to! 

“What’s on your watchlist?” Is a query that I receive from options traders almost daily. There are literally thousands of various stocks that are listed on the exchanges and available to trade and invest in. The standard professional day trader or hedge fund only accesses and utilizes a small fraction of those available. For example, I only have a total of +/- 40 stocks on my daily watchlist. The reason for this, is the strategies that I use and trade with simply are not supported on a majority of stocks. So, how does someone narrow down, select and organize the proper stocks to trade and invest in? 

A proper stock trading watchlist should contain candidates that the trader wants to examine on a daily, weekly, and perhaps monthly timeframe. It is recommended that the trader have an understanding of how the various stocks on the watchlist will react to individual catalysts (news, geopolitical, earnings reports, etc), and how these reactions may affect other stocks on the watchlist. If a majority of a trader’s watchlist is comprised of tech sector stocks, then the trader needs to be aware of any catalysts that may affect the sector as a whole. It is time consuming and complicated to dial-in a watchlist that is a perfect fit for you as a trader; and it’s important to note that asking someone: “What’s on your watchlist?” is not an effective means of developing your own. 

Guidelines

Being that this article is posted on an options trading website, we can narrow down our potential candidates immensely, with the fact that a good portion of stocks do not offer options. Even with this filter, every trader’s watchlist breadth is going to depend on how much time they are able to commit to developing and maintaining the list. In your initial setup of the watchlist, avoid being too specific with your requirements. I know many traders who have hundreds of stocks on their watchlist. This can be extremely overwhelming, especially to the new trader. With all of the potential setups, traders can get a sort of analysis paralysis that leaves them frozen and unable to execute on any of the trade opportunities sitting right in from of them.

What I recommend, and practice, is to start with a handful of stocks, and become a master of those. Only once you have mastered them, begin adding in other stocks to master as well. While this may feel limiting at first - there is a benefit. You will become very familiar with how the stock moves, what patterns are forming within the price action, how catalysts may affect it, and a variety of other advantages. To put this into perspective, I focused on and became a master of $AAPL before touching any other stock. Even years later, $AAPL is my bread and butter for day trading and swing trading. 

Scanning and Setup

When looking for options trading candidates to be added to your watchlist, the most important aspect to consider is liquidity. As previously mentioned, we (obviously) need the stock to offer options contracts - But if options are offered, and there is not any volume (or volume is very light) on the contracts, these stocks are equally as worthless. 

Further refinement will depend on your specific strategy (check out the Options Mastery Course for ideas), timeframe and trading style. Start your watchlist with some market leaders. Be sure to include a wide variety of sectors within your watchlist. Utilize your broker’s platform, as well as sites like FinViz and Stockcharts to identify the potential trading setups that you are looking for. This approach will allow you to build an adequate list that you can master by day and refine by night. 

Bottom Line

Eliminate the day-to-day distraction of deciding what stocks to focus on and trade. Build a compelling watchlist that is tailored to your style and activity as a trader. Find the liquidity and then add stocks that meet your technical trading approach. Comb through the list every evening (or as time allows) and make adjustments, whether it be additions or subtractions as you see fit. This is the key to taking the guesswork and headache out of establishing and maintaining an options trading-specific watchlist.