How to Create Options Watchlists

You probably remember the moment—the one where a stock jumped 50% overnight, and you had no idea it was going to happen. It's a frustrating scenario, but what if you could anticipate these moves? This is where creating options watchlists comes into play.

Most traders start building their options watchlist the wrong way. They focus on the wrong details, missing the bigger picture. They look at stock price changes or even just company news. But the real pros? They know to focus on the volatility and the open interest of an option contract to stay ahead of the game.

Let’s dive into what it really takes to build a smart options watchlist, one that gives you an edge in the market and increases your chance of success.

Start with Defining Your Strategy

Before you start throwing random stocks into a list, you need a plan. Are you trading long-term options? Short-term? Do you have a particular sector in mind? The type of options you trade should reflect your goals. Defining your strategy upfront allows you to filter out irrelevant choices.

• Long-Term vs Short-Term: If you’re trading long-term, you'll want to focus on contracts with a long expiration date, ideally six months or more. These give you the time cushion needed to navigate market volatility.
• Volatility-Based Watchlists: If you're a volatility trader, your focus should be on stocks with high implied volatility (IV), as these options tend to offer higher premiums.

Once you’ve defined your strategy, it's time to start populating your watchlist.

Step 1: Identify High Volume Options

The first step is to identify options with high volume. High volume indicates that a lot of traders are active in that stock's options, meaning there's more liquidity. Liquidity is crucial because it allows you to enter and exit trades with minimal slippage.

For example, let's look at Tesla. Tesla’s options often have some of the highest volumes in the market. But just because an option has high volume doesn’t mean it’s a good trade. You also want to ensure that the stock’s implied volatility (IV) fits your trading plan.

Step 2: Look at Implied Volatility (IV)

Implied volatility can help you determine whether an option is overpriced or underpriced. Higher IV generally means higher premiums, but it also indicates a more volatile underlying asset. On the other hand, low IV can mean cheap options, but with limited movement potential.

You can check IV using most brokerage platforms or through websites like the CBOE’s options data. Ideally, you want to target stocks with medium to high IV, as these stocks are more likely to offer significant price swings.

Step 3: Focus on Open Interest

Open interest represents the total number of options contracts that are open and yet to be closed. It's a great indicator of how much interest there is in a particular option contract. More open interest means more market participants, which can lead to better price discovery and tighter bid-ask spreads.

If you're adding options to your watchlist, always ensure they have substantial open interest. A contract with little to no open interest may be difficult to trade, and you could end up paying a premium on slippage.

Step 4: Keep an Eye on Earnings Announcements

Options tend to move significantly around earnings announcements. Stocks often experience increased volatility leading up to an earnings report, which in turn affects options prices. Having a section in your watchlist that tracks upcoming earnings dates can help you prepare for potential big moves.

Let’s say Amazon is set to release its earnings in two weeks. You might want to add its options to your watchlist because the IV will likely spike as the earnings date approaches. This creates opportunities for strategies like straddles or strangles, which profit from increased volatility.

Step 5: Don’t Forget the Greeks

The Greeks—Delta, Gamma, Theta, and Vega—are the building blocks of options pricing. Each one provides unique insight into how your options will behave given changes in the market. If you're more conservative, you might focus on options with high Theta, allowing you to collect premium as time decay works in your favor. On the other hand, if you're aggressive, Delta and Vega might play a more prominent role in your decisions.

Understanding how the Greeks affect your options will allow you to better fine-tune your watchlist, ensuring you're only monitoring contracts that align with your strategy.

Step 6: Regularly Revisit and Refine Your List

Building a watchlist isn’t a one-and-done task. Market conditions are constantly changing, and so should your watchlist. Every week, take the time to revisit your list and ask yourself:

• Have the stocks I’m watching released earnings?
• Has the IV changed significantly?
• Are there new stocks I should consider adding based on volume or volatility?

Constantly refining your watchlist ensures you're staying on top of market moves and not missing opportunities.

Practical Example: Building a Watchlist with Tesla, Amazon, and Nvidia

To make this more tangible, let's create a basic options watchlist using Tesla, Amazon, and Nvidia as examples.

Stock	Implied Volatility	Open Interest	Earnings Date
Tesla	60%	5000	April 25th
Amazon	45%	4500	May 1st
Nvidia	55%	6200	April 28th

In this example, Tesla’s high IV and open interest make it a prime candidate for a volatility-based trade. Amazon’s upcoming earnings announcement makes it a target for an earnings straddle. Nvidia, with its balance of high IV and strong open interest, could be a strong candidate for both short and long-term options strategies.

Tools to Build Your Watchlist

Here are a few tools that can help you efficiently build and maintain your options watchlist:

1. ThinkorSwim (by TD Ameritrade): Known for its advanced options trading tools, ThinkorSwim allows you to monitor volatility, open interest, and other key metrics in real time.
2. Interactive Brokers: Offers a wide range of options trading data, including Greeks and IV, directly within their platform.
3. Yahoo Finance: A more general platform, but still useful for tracking earnings dates and general stock performance.

Final Thoughts

Creating a robust options watchlist is about more than just adding stocks. It’s about filtering for the right options that align with your trading strategy, whether that’s focused on volatility, open interest, or earnings potential. Regularly revisiting and refining your list will ensure that you're always prepared for the next big move, allowing you to capitalize on opportunities that others miss.

With the right tools and approach, you'll find that your options watchlist is one of the most powerful resources you have at your disposal as a trader.