Penny Priced Stock Options

Posted by Nick Niesen on November 8th, 2010

Sometimes investors feel that they do not have sufficient leverage. When this happens, they find it difficult to use the opportunities that present themselves and make a profit from them. Penny options are one good way to gain leverage and build your portfolio at the same time.

A lot of stocks are priced incrementally ? for example, at five or ten cent increments. Penny stock pricing methods do not use increments but vary by pennies. Traders can increase their leverage with penny stocks because they can get into trading with less capital to start with and if their stocks should fail, they have not lost too much.

With penny options, you can make a profit in a relatively short time because you are playing in a smaller field and with less money. A lot of people like the penny stock idea because you cannot lose more than your initial investment. Options, as opposed to underlying stock, do have some drawbacks though. Penny options can change massively in a short period of time. These might be positive changes for you or negative.

It is important to find out whether a penny option would suit your requirements. A penny stock might be cheap but perhaps the liquidity does not suit your needs. You have to find out what the brokerage cancellation policy is too. Also, ask what the time decay of the options is before purchasing them. Before you buy anything, ask yourself for how long you plan to be trading the options. You should buy options that expire well after when you plan to sell, so if you want to trade an option for 10 days, choose one ending in 30 or 40 days.

If you already decided that you are going to trade for one day only, there is no need to worry about expiration dates. The front month option should work fine for you in this instance. Penny options are not actually that common these days. Traders and crafty brokerage firms use the method so others should catch up soon.

You have to be patient when trading penny stocks. The options can move quite a lot in just a few minutes so if you are too nervous, you need to relax rather than panic. If you are prone to panic and stress, maybe penny options are not a good idea for you.

If you are interested in increasing leverage but do not have enough capital to begin with blue chips, penny options are a good way to start.