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A hedge fund analyst explains his stock research process. Full of excellent links to videos, articles, and books. Why don't penny stock investors play options instead? One thing I've never understood--a bunch of novice investors try to play penny stocks because they're cheaper and they generate higher short-term returns.
The downside, of course, is that they're easily manipulated. So why don't novice investors play options instead of penny stocks? They can't be manipulated as easily, and they have huge returns and risks--but you can still bet on a big name. I suspect there's a high correlation between penny stock investors and people who buy deep OTM options hoping for a home run. This sounds like one of those Black Swan strategies that loses you tiny bits of money for years and then all the sudden makes you a mint.
The entire black swan argument is that the market is systematically underpricing short gamma. The problem is for I personally think Penny Stocks should be banned - they are used for pump and dump schemes that take advantage of uninformed people leaving them holding a illiquid stock that is worthless. The question is how you define a penny stock.
There are growth companies that have potential and aren't just empty shells that are not valued very high. I meant, how do you differentiate for the purposes of banning them. What legal criteria do you use.
I don't agree with banning them all honestly, I think if you do research and understand the risk it should be an option. If you don't require reverse splits then how would you require the share price to be above x? Or would you just not allow those companies whose shares are valued below x to be traded publicly? I have a hunch that LettersFromTheSky is unaware that all penny stocks used to be high priced stocks that flopped.
He seems to believe that they are born as penny stocks with the express intention of swindling the naive. Nobody is forced to buy Penny Stocks. I got burned on weeklies but I don't think it should get banned. I stopped messing around with it. I think intent matters. Apple, Microsoft or other stocks don't really exist and weren't created to deceive investors, many penny stocks were. But there is no difference from buying one stock or another judging it by the price, or at least there shouldn't be.
Value is different than price. Penny stocks give a sensation of volatility and faster grow, which many new investors are looking for. If you're completely wrong with an option, you lose all your money or at a minimum, all of the 'time value' associated with it, if it was an in-the-money contract.
The other thing is manipulation and hype associated with penny stocks, which in the options world is usually led to institutional holders and much, much larger movements of money.
Options are generally used to make a bet on 'catalysts,' which are usually something like an earnings report, a conference call, new hiring of a CEO This is only if you don't know what you are doing, in which case you have no business playing options. As a spread trader really, an 'options trader' better always have a short for each long , I shake my head when people look at the risk levels of a naked short put as how risky options trading is. A short Put has unlimited risk and limited reward, so it's an easy example for how insanely risky a bad options trade can be.
If you're short a put, be long a put as well. As you get further into it, you'll realize even a simple spread gets pretty deep - for example the credit spread is long 'time value' theta , and vice versa for the debit spread.
You can learn a lot with only a few hundred dollars on the line. Thank you for the explanation. Just to clarify, the risk IS limited to the stock dropping to 0, rather than simply shorting a stock where the risk is literally unlimited?
I guess that's true - it's a naked short call that the stock can experience unlimited increases and you'll be on the hook to buy the person's stock at any increased price to infinity. Page 57 starts with risks disclosures, the most important being the risk of losing your entire investment in a relatively short period of time.
Meanwhile, you're still paying brokerage fees and short term gains rates. I think most novice investors don't know what options are. It's just a buzzword they hear on TV. Hell it's even hard for some of them to understand how equities work. It could be that they are trying to get in on the ground floor of the next big thing, where as options are generally only traded with large well established companies.
So say in the case of a random pharmaceutical company you would be investing in the idea that they are going to create the next Viagra. They are both risky but I guess an upside would be the lack of an expiration date, well unless you count the date the company goes bankrupt.
Penny stocks are like pipe dreams where options are just a derivative of the company. It's hard for many people to conceptualize derivatives especially how fast they move, where as penny stocks stay small for long times giving people time to hype the stock.
I would guess, novice investors that know how to trade options , do. Only highly traded stocks have options every month or even twice a month expiry and a strike price every 50 cents or dollar, etc. Give me some examples, I'd love to sell them.
This is well outside of my wheelhouse so I'm not aware of this market. Maybe he meant that options are in chunks of shares besides minis. So that 14 cents is actually 14 dollars.
I'll quote my first post for you. It would be hard to make money on 0. Open interest and lack of strike prices. Sometimes platforms have fees per contract. Penny Stocks, while risky, move for discernible reasons. Option prices move for a lot of different reasons. Also, options are a money suck for retail investors just as penny stocks are.
Retail can't afford to put on smart options strategies. Second while it's true the majority of options expire worthless the majority of options are use for hedging purposes.
One serious fund manager's hedging activity could be equal to the activity of all the retail options investors trades.
On our way from the hotel to the place we eat we walk past a casino and on the side are these nice posters of people dressed nicely playing blackjack, slots etc. I noticed one of them was a picture of a roulette wheel and the ball was in black 8. We played slots and halfway through I decided to take a little break and walk around the casino and look around.
I saw this attendant at the roulette wheel by himself spinning the wheel without any patrons I think he was just borred. I decided to watch one spin just for the hell of it and it landed on black 8, just like the poster. Later on that day I told my parents about the poster and the roulette spin I watched and they both laughed at me, my mom was joking about how one casino trip and my Dad already turned his son into a gambler with his own lucky number hehe.
The 3rd day was sunny but the visibility in the ocean was super low, so again we had to cancel our plans to swim. My Dad and I went to the casino again and after about 2 hours when we said 1 hour my Mom came in and told us to stop and help her pack our things because we would be leaving soon. But even better were the faces on my Dad, Mom, and the couple who didn't make anything on that spin despite putting down 10 times more on the table.
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