07 · Opportunity Selection — *Which* Underlying to Trade

Educational use only — not investment advice. See full disclaimer in README.md.

The strategy selector tells you which structure fits the market. This file answers the question that comes before it: which underlying do I put it on? You can’t run the matrix until you’ve chosen a name — and “the one I happened to look at” is not a reason. Professionals spend more time on opportunity selection than on strategy selection, because the edge often lives in what you trade, not how you express it.

Where this fits in the loop: after the broad-market read (01), before the strategy matrix (02). It narrows a watchlist down to 1–3 ranked candidates, each with a one-line reason. Then you tag and select each.

1. Build a fixed watchlist (do this once)

You don’t scan thousands of tickers each morning. You watch a curated, liquid universe you know well, and pick from it. A good default for a US options trader:

  • Core indices/ETFs (always liquid): SPY, QQQ, IWM, SPX (and DIA). These are your bread-and-butter — tightest markets, no single-stock surprise, SPX for tax/settlement edge.
  • Sector ETFs (for rotation plays): XLK, XLF, XLE, XLV, SMH, XBI, etc.
  • Liquid mega-caps (deep options): AAPL, MSFT, NVDA, AMZN, META, GOOGL, TSLA, AMD, etc.
  • A short “situational” list: names with an imminent catalyst (earnings this week, a known event). (Where to find catalysts, calendars & relative-strength screens: ref-data-and-news-sources.md.)

Keep it to ~20–40 names you actually understand. A liquid name you know beats an exotic one you don’t. (See ref-underlying-classification.md for how each type behaves.)

2. The ranking factors — score each candidate

For each name on your shortlist, assess these. They sort into “what makes a name tradeable” and “what gives it an edge today.”

A. Tradeability gates (binary — fail any, drop the name)

  • [ ] Option liquidity: tight bid/ask (penny–nickel on liquid names), healthy open interest and volume at the strikes you’d use.
  • [ ] Underlying liquidity: real share volume; not a thin/halt-prone name.
  • [ ] You understand it: you know what moves this name and roughly how it behaves (its “personality” — see classification ref).

B. Edge factors (the more that line up, the better the opportunity)

Factor What you’re looking for Why it matters
IV Rank fit High IVR (>50) if you want to sell; low IVR (<30) if you want to buy The single biggest edge filter — pick names where vol is mispriced in the direction your strategy needs
Relative strength / weakness Outperforming (for bullish) or underperforming (for bearish) the index Trade leaders for longs, laggards for shorts — don’t fight relative trend
Catalyst proximity A reason for this name to move now (earnings, event, breakout, news) “No catalyst” = lower conviction; a known event = use the event playbook
Technical setup quality Price at a clean, mapped support/resistance, or a confirmed breakout Gives you defined “wrong if” levels and better entries
Expected-move mispricing Your forecast move ≠ the options-implied move (see §3) This is the volatility edge — the heart of options trading
Volume / ATR expansion Rising volume or range vs its average Confirms something is actually happening, not drift
Sector alignment The name’s sector is leading/lagging in the direction of your view One more confluence point

Rule of confluence: one factor is a coincidence; three-plus pointing the same way is an opportunity. If only one weak factor supports a name, it’s probably a no-trade.

3. Expected-move mispricing — the core options edge

This is the factor most retail traders skip and most professionals lead with. Options price in an implied move; you have a forecast move. The edge is in the gap.

  • Implied (expected) move ≈ ATM straddle price for the expiry (≈ 0.85× the straddle as a tighter estimate). See ref-greeks-iv-mechanics.md §5 and strat-volatility-event.md.
  • Your forecast move = how far you genuinely think it travels in that window, from the catalyst, technicals, and history of how this name reacts.
Your forecast vs implied What it means What to do
Forecast > implied Options look cheap — the market underprices the move you expect Buy premium (debit spreads, long options, straddles)
Forecast < implied Options look rich — the market overprices the move Sell premium (credit spreads, condors, strangles)
Forecast ≈ implied Volatility is fairly priced — no vol edge No vol-based trade (you’d need a pure directional edge instead)

This is why “what’s the expected move?” belongs on your daily card. A bullish view on a name whose options already price in a huge move is often a worse trade than a neutral view on a name whose options are cheap.

4. A simple ranking score (optional but disciplined)

When two or three names compete, score them so the choice is objective, not emotional. Quick 0–2 per edge factor:

For each candidate, score 0 / 1 / 2 on:
  IV-Rank fit (for your intended direction)   [0–2]
  Relative strength/weakness aligns           [0–2]
  Catalyst present & clear                     [0–2]
  Technical setup quality                      [0–2]
  Expected-move mispricing in your favor       [0–2]
  Volume/ATR confirmation                      [0–2]
  ─────────────────────────────────────────────────
  TOTAL (max 12).   Trade the highest score(s) that also pass the liquidity gates.
  Rough cut: 9–12 = strong · 6–8 = ok, size normal/down · <6 = pass.

This is a prioritization tool — it ranks candidates against each other. The final go/no-go and full quality grade happen in the trade-quality scorecard.

5. The “why this name today?” test

Before a candidate advances to the strategy matrix, you must be able to finish this sentence in one breath:

“I’m trading [ticker] instead of the index because [relative strength / IVR / catalyst / setup], and I expect [move] vs the implied [move], so my edge is [direction / vol / theta / event].”

If you can’t fill in every blank, the honest answer is trade the index instead, or don’t trade. The index (SPY/SPX/QQQ) is always the default when no single name earns its place — it’s liquid, diversified, and free of single-stock gap risk.

6. Worked example

Morning read: broad market mildly bullish, VIX 16 (low-ish). You’re hunting a bullish trade. Three candidates clear the liquidity gate: NVDA, AAPL, XLF.

  • NVDA — IVR 28 (low), earnings in 3 days (catalyst, but IV will ramp/crush), relative strength strong, implied move ±8% and you think it moves less than that into the print. Mixed: low IVR favors buying, but the earnings catalyst + you expecting a smaller move argues for selling the rich event premium. Score ~8.
  • AAPL — IVR 22 (low), no catalyst, in-line relative strength, drifting mid-range. Cheap vol but no reason to move → weak. Score ~4.
  • XLF — IVR 55 (high), financials leading the tape (relative strength), clean breakout above resistance, no binary event. High IVR + breakout + sector leadership = sell premium into a bullish lean. Score ~10.

Pick: XLF. Highest score, clean confluence, and the high IVR points the matrix cleanly to a bull put credit spread (bullish + high IVR → sell premium). NVDA becomes an event trade if you want it (different playbook); AAPL is a pass. The opportunity selection did the hard part — by the time you reach the strategy matrix, the name and the structure both fell out of the analysis.

Next: take your top candidate(s) to 02-strategy-selector.md, then size (03) and grade the setup (08-scorecard.md).