Whats the point of Penny stocks? (vs Options)

[butterfacetrader]

For the record I don't do penny stocks. Never have. And frankly I don't think I ever will unless I have an itch to throw away $500 for fun (most of the time I don't and my limit will be $500 max if I do). Mostly also, the commissions are too expensive to play with that stuff.

Anyway, seriously what is the point of trading penny stocks?

The whole allure of penny stocks is high volatility. Thats basically all that is. It tends to make big moves. So it is volatile. The drawback is there is often little to no liquidity most of the time and you can lose it all. The bid-ask spreads are often terrible even when there is a market. And finally, the commissions for some volume or per share based brokers, unless you are using fixed rate brokers, are often very expensive.

Enter options. If someone wanted to play very volatile stuff, why can't people just bet instead with options that is highly traded. The benefit is you also get those 50% 100% moves easily. The liquidity is often better if you choose the right underlying options market. The commission structure is often cheaper too.

So goes back to my point, whats the whole point in trading penny stocks when you can get that same sort of 'rush' with straight up long options speculative bets?

My feeling is, its a gimmick that people find a niche in. Maybe they specialize in 'identifying the pump and dumps' and know when to short the pumps. Who knows. But as far as making big moves, the options market has plenty of juice and is as far as I'm concerned, a way more legit and safer market than OTC or pink sheet stocks.

 

[xandman]

There's a big psychological aspect of paying daily theta when the stock won't move.

With penny stocks, your hoping your on the side of the pumpers. I've thought about trading pennies before, but it requires totally different "underground" info sources.

Btw, I think that's one of the reason the forum doesn't cater to penny stock trading. It's elitetrader, not elitepiker.

 

[butterfacetrader]

Sure there is decay but you could also take it out a few months out. Most people playing penny stocks arn't holding that long too right? I suppose they could hold onto a highly illiquid penny stock for a year before it makes a move. But people trading penny stocks are in the game of trading anyway. In and out. Try to time the options market better. Honestly, most stocks, except some blue chips, are not going to be range bound. So you are bound to get big moves. Say you buy TSLA calls or puts a month out. Guarenteed the underlying TSLA stock will move big % moves between now and the expiration. Which means the options will make huge moves. So now its a matter of getting the direction right.

Its good this forum doesn't cater to it. Frankly I'm even puzzled at the logic behind why people do penny stocks. I think if people want that volatility they can easily get it with options or futures.

Or maybe its because options and futures are not accessible for most of the people that trade the penny stocks. That will be another logical reason. Otherwise, anyone who has level 1 access to options (buying selling calls/puts) can bet like a king of volatility using options. No need to mess with penny stocks at all, me thinks.

 

[lotto]

Btw, I think that's one of the reason the forum doesn't cater to penny stock trading. It's elitetrader, not elitepiker.

I think the reason the forum doesn't allow penny stock discussions is because nearly everyone lacks any understanding of that market as a market. I would bet that amongst the universe of millionaire traders, most here at ET would be very much surprised by the size of the subset of millionaire penny stock traders. So long as you always keep in mind that every company you are trading is a piece of shit that doesn't deserve to be in business, much less to be a publically traded entity, and so long as you stick to actively traded pumps/dumps, you can do quite well, and it is far easier than trading the gosh awful ES. The real danger is that someone becomes like one of the wolfpack followers on twitter who allows himself to be convinced that there is a "fundamental story" to one or more of these companies and then treats the trade as though it is an investment. Penny stock trading is best viewed as taking advantage of an actively traded market for a particular stock in a crappy company, positioning oneself on the right side of the supply/demand pressure for shares of the stock, and then moving out when the issue once again becomes, as they all eventually do, dead money.

 

[lotto]

Its good this forum doesn't cater to it. Frankly I'm even puzzled at the logic behind why people do penny stocks. I think if people want that volatility they can easily get it with options or futures.

It is far easier to operate profitably in the world of OTCs & pinks than it is to operate profitably trading futures or options. There is a logic to each and every penny stock play, and each is identical to the last in form.

Just look at the recent daily/weekly charts of MINE, FROZ, ERBB, PLUG (merely a very successful pump and dump) LIVE (another very successful pump & dump), TGRO, VEND, CNTO ... the list goes on and on. Very predictable, highly repeatable patterns. The big risk now is that the SEC has become very aggressive with issueing trading suspensions that often send the shares to the grey market once trading resumes, and this is where even a knowledgeable player can lose a significnat portion of one's capital (see, for example, PHOT)
Penny stock trading is a specialty unto itself - in many ways, it is a throwback to the days when traders truly traded the tape and not charts laden with layers of indicators, which is why, for example, the ability to read and interpret level II is a highly desirable skill for a penny stock trader.

 

[Wide Tailz]

It's already been said but I'll reiterate:

1. No time decay

2. Tighter spread

3. Price not dependent on implied volatility

4. Most pros and experienced traderz are disgusted with the thought of ever being caught dead with a penny stock in their account, so the price action is very easy to read

5. I'm seeing upwards of 10:1 reward to risk with basic setups for some of the good ones, and a bad one might give you 1:1. With normal small capx the best I've seen is about 5:1

 

[Wide Tailz]

Sure there is decay but you could also take it out a few months out.

Friend, I've wasted enough years trying to beat the long option game and found there are few times when the oddz favor the buyer. Whether you go a few months out or a few weeks, you still pay for the time you owned the call or put. The one thing an option does give you is a "call" (pun intended) on the Vix level, whether you go long or short. Vix is a nice spikey instrument so if you get in at the bottom (which is usually a pretty obvious area) all you can do is wait to ring the cash register, if the time premium does not get you first.

And then there's opex Friday and the price weirdness that results :eek:

Long options are brilliant when you are on the right side of a vix spike, and this very phenomenon is what got me hooked on the trading game way back when..... but later I found that they can grind your account down to nothing in a matter of months if you don't catch any tails.

 

[xandman]

.....to add to that you could have a flat portfolio of penny stocks where one mover makes your month.


A portfolio of long options would be a difficult drag. So, only use options if you are trying to get a volatility edge. For leverage, do futures/forex.

 

[butterfacetrader]

Options can wither away into nothing as it decays. But penny stocks can go to $0 also.

What is the average holding time for penny stock traders anyway? A few weeks most? I can't imagine someone holding a bunch of penny stocks for 20 years. Or maybe thats the strategy on the long side of penny stocks until the pump & dumpers find their way to your stock to pump it and you get out.

On the short side of penny stocks, I can totally imagine people getting wiped out fast. Some penny stock traders supposedly specialize on the short side, e.g. sykes. If some pennies make upward 100% moves and you are short, then you lose fast. Sure, maybe you go in with a small position and you put stop loss. But shorting these volatile penny stocks with poor liquidity is probably quite risky. Oh yeah, sure, you need to take risk to make money. But whats the difference between shorting $1000 of penny stocks, with potential of gap ups above a stop loss set at equivalent to risking max $3000 loss. Versus spending $3000 to buy puts or calls on say large cap internet stocks like LNKD or GOOG for a swing trade.

I'd imagine the correct mentality before every trade you enter is you will and prepared to probably lose it all. So the way I see it, risking $3000 with shorting penny's (via a stop loss) or being long penny's (max invested) - is no different than just buying 1 ATM GOOG expiring late 2014, that will give you some big swings inbetween. You plan to be in and out anyway, so you're not planning to hold it until 1 months out when the decay really kicks in. Lets look at commissions. For most brokers with variable commissions based on shares, trading penny's will cost a lot of money, maybe couple hundred dollars commision for a good amount of shares. Whereas buying 1 put with the same volatility costs max $11 even for the worst of options brokers.

 

[lotto]

Most penny stocks do eventually go to zero or close to it. Some penny stocks do escape death, and a few even manage to uplist to the NYSE or Naz. Nutrisystem (NTRI) years ago traded under the ticker NSI and traded for under a dollar for quite a while before going on an epic run to $70 or so. Applied materials (BOOM) another penny stock that made it. Others make spectacular runs but fundamentals eventually catch up and the stocks crashes and burns (see recent charts of LOTE and UNXL). PLUG was trading for 15 cents/share this time last year, and it traded as high as 11.72 in March. Guess which of those two figures PLUG will likely be trading nearer to this time next year.

By and large the way to make money trading penny stocks is to buy the pump and short the dump. This requires you to wait for an active market in the shares of a particular stock to develop. You don't just throw darts and start scooping up shares and anything trading on the "cheap." These phases of the penny stock life cycle (the pump and the dump) are relatively easy to spot. The key fact that should be kept in mind when thinking about these stocks is that 99.999% of these companies are shitty, sketchy, shady etc. and that shares in these companies are not investment grade securities. These are nothing other than trading vehicles - but the fact that they trade in these identifiable patterns of rampant demand followed by panicked supply can make them far less risky than most would think. However, holding too much overnight has become riskier since the SEC has formed its microcap task force that has actively and aggressively suspended trade in the most blatant pumps. If you are long and the stock is suspended, your likely loss will almost assuredly be a minimum of 50%, and often 90-100%.