The stock market can be intimidating for newbie traders. You have to have a clear idea of when to enter a position or exit one. Also, a sound understanding of fundamentals is needed. That expertise takes a lot of time to develop. However, when you see a headline or watch a program that tells you about the best stocks for trading options, you might be a bit confused.

Options trading is a much easier and safer way to play the market. In simple terms, an option is a commitment that gives a person the right to buy (calls) or sell (puts) shares of an underlying stock at a predetermined strike price and expiration date. While options give you the right to buy or sell shares of an underlying stock, you have no obligation to do so.

Call options are “in the money” when the underlying stock rises above the strike price. Put options are “in the money” when the underlying stock price drops under the strike price. If you have an in-the-money call, then you can purchase stock at a discounted price. Selling an in-the-money put means you make a profit by trading the right to sell the underlying stock at the strike price, fetching more than what they’d get on the Street. You can also decide not to exercise the contracts and close your options at a profit.

With that in mind, let’s look at the best stocks for trading options:

• Palantir Technologies (NYSE:PLTR)
• Tesla (NASDAQ:TSLA)
• Bank of America (NYSE:BAC)
• Netflix (NASDAQ:NFLX)
• NVIDIA (NASDAQ:NVDA)

Best Stocks for Trading Options: Palantir Technologies (PLTR)

Our first entry on the list is a bit controversial. Palantir is a big data and analytics software company founded in 2003 with capital from investors, including the CIA. Its close association with the Pentagon makes it a tough sell for ethical investors. Palantir provides, for example, software for Immigration and Customs Enforcement (ICE) to conduct its deportation raids. However, it has one of the highest options volumes at the moment.

And it makes sense, since the company has been making a lot of noise recently. Palantir decided to go with a direct listing instead of an initial public offering (IPO), following in the footsteps of Slack (NYSE:WORK), Spotify (NYSE:SPOT) and Asana (NYSE:ASAN), among other major mature startups.

Palantir earned $78.8 million of revenue from the Pentagon in the first half of the year. This amount is more than the year-ago total revenue figure. Looking ahead, the company has guided to full-year revenue from $1.05 billion to $1.06 billion this year.

Tesla (TSLA)

TSLA stock is the gift that keeps on giving. Tesla is now the biggest automaker in the world, with a market capitalization of $594.4 billion. After several years of unfulfilled promises, it’s finally delivering.

In the third quarter, Tesla reported net income (GAAP) of $331 million on $8.77 billion. For the period ending Sept. 30, Elon Musk’s electric carmaker reported deliveries of 139,300 vehicles. Operating expenses did rise to $1.25 billion, up 33% from last quarter, but that was mainly due to new factories in Austin, Texas, and Brandenburg, Germany.

Considering its expansionary attitude and foothold in key markets, it’s no surprise that Wedbush analyst Dan Ives boosted his bull-case target by 25% — taking it from $800 to $1,000. InvestorPlace editor Sarah Smith wrote an excellent article regarding the development and catalysts pushing TSLA stock higher. 

Bank of America (BAC)

A bellwether for the banking industry, BAC stock is a very stable performer in the long run. However, it is subject to peaks and valleys during a shorter horizon. Year to date, shares have lost about 31% versus the S&P 500, but the three-month return is at a solid 9.7%, highlighting the volatility you are in for if you invest in this one. The banking giant is one of the largest U.S. banks in total assets and is highly sensitive to interest rate changes.

In its recent earnings report, Bank of America reported total revenues of $20.34 billion, which fell short of revenue consensus estimates and is 11% lower than the year-ago period. In response to the novel coronavirus pandemic, the Federal Reserve instituted a near zero-rate policy that has dealt a crushing blow to the banking industry. But this is BAC stock we’re talking about. It has the funds and the assets to weather this storm and then some.

Netflix (NFLX)

For some stocks, the pandemic is more of a boon than a curse. Stay-at-home orders have led to a substantial increase in streaming as people forgo the theater to catch their favorite movies and shows online. Understandably, it has led to outsized valuations for several streaming companies, chief among them Netflix.

What’s more, Apple (NASDAQ:AAPL), Disney (NYSE:DIS) and Amazon (NASDAQ:AMZN) are increasingly investing in their own streaming services and reaping the rewards. Although Disney disappointed analysts with its latest earnings report, the company did manage to astound investors when it revealed that it had hit 73.7 million paid subscribers in its first year.

In short, the competition is heating up.

Nvidia (NVDA)

Our final entry on this list is the biggest mobile computing and automotive chip manufacturer in the world. Although the pandemic led to NVDA stock plunging, it has regained a lot of ground since the summer. Shares are trading at record highs, and they are expected to keep gaining strength. NVDA stock has a higher-end 12-month price target of $700 per share.

However, speculation continues to trump fundamental analysis with this one, as investors price in gains before they are made. Also, one has to be mindful that Advanced Micro Devices (NASDAQ:AMD) is a credible threat, supplying chips for  Sony’s (NYSE:SNE) PlayStation and Microsoft’s (NASDAQ:MSFT) Xbox consoles. However, investors aren’t factoring this in. I guess that’s what happens when you have such a stronghold on the sector.

On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.