Options trading has always been where I go to make (and sometimes lose) fast money. Through the years I’ve done regular stock trading and American stock options trading. As near as I can remember, I never did ETFs, Commodities or Bonds. Different strokes for different folks, I guess.
For me, options trading has always been my “home” because regular stocks are way too slow and they take a lot more money, too. However, in the past year or two I tried another way to make money trading stocks, penny stock trading. And, in the final analysis, I think that I like to trade penny stocks better than trading stock options.
This article is about what, as a very experienced trader, I like and don’t like about both options trading and penny stock trading. Hopefully my analysis and perspectives will help you decide which you would like to try… Or, help you decide that both or neither are right for you.
But first a warning. If you are an experienced financial markets trader, you are probably familiar with the Pattern Day Trader rules. If you are just starting out, you absolutely need to know about this.
I won’t go into the “why” of the Pattern Day Trader rules but I will net it out for you, as I understand it. Basically, at the time of this writing, the rule nets out to this:
In a margin account, if you do 4 round trips (buy and sell the same security) in any 5 day period, you will be flagged as a pattern day trader. If you are flagged as a pattern day trader you will be required to maintain a minimum margin account balance of $25,000 USD. If you fail to do so, you will be required to trade as a cash account.
Look the rule up and make sure I netted it out correctly and, if necessary, talk to your attorney about it and how it might affect you. I am not responsible if you get it wrong… Even if I caused the problem.
I get around it by never trading options in a margin account. I trade options in a cash account, only.
First I’ll talk about Trading Options.
While I have almost always gravitated toward trading options, I like some things and dislike other things about options trading.
Options Trading Likes
Here are my major likes about option trading.
With options trading the thing that I like most about it is that it is so highly leveraged. Because of that it takes less money, and I can make a lot more profit than if I trade regular stocks, if I do it right.
They move very fast so I can get in and out in a day or two.
Options trades clear overnight so I don’t need to wait 3 days to trade again…. Remember, I always trade options in a cash account, only.
I normally only trade major companies with a LOT of volume so research is fairly easy or non-existent for me. It is usually limited to being aware of current news that is going to make the underlying common stock move.
Long or Short is not really an issue for me. I get on the train based upon the direction that I think the stock is going to move with the appropriate Put or Call.
I don’t usually hedge but if I did there are numerous strategies that are available which I could use if it were appropriate.
I like having the choice as to whether I want to trade “In the money,” “out of the money” or “at the money.”
Options Trading Dislikes
Here are what I dislike about options trading.
They expire so I can lose my entire investment.
They expire so I can get trapped in a position and be forced to liquidate at a major loss.
Next, I’m going to discuss what I like and dislike about trading penny stocks.
Penny Stock Trading
Penny stocks, like any security have good and bad points. I do, however, need to address one thing…
… Most people, when they discuss penny stocks, immediately go to “Pump and Dump” or fear of other frauds as the reason that they haven’t used penny stocks as an investment or trading vehicle.
The truth is that they are responding to what they have heard from someone who probably didn’t have a clue about penny stocks, who heard it from someone who also didn’t have any idea about the truth about penny stocks and so on.
While it is relatively easy to perpetuate a fraud in the penny stock landscape because of regulatory issues, I think that it’s also relatively easy to spot them if you do good research. In fact, the only actual frauds that I personally have ever heard of have all been with listed stocks such as Enron, Adelphia, Arthur Anderson, etc. They are all big companies.
There are many small, insolvent or almost insolvent, companies in the penny stock environment… companies that should be avoided at all costs… But, I’ve never actually run into a fraud myself that I am aware of. Likewise, there are also many listed companies, large, multimillion or billion dollar/year companies that should be avoided at all costs because they are insolvent or almost insolvent.
In all cases the universal antidote for financially weak investments and speculations as well as outright frauds is research. It doesn’t really matter how big the company is or isn’t… Research will almost always protect you.
You pick your poison…
I choose penny stocks because I can make more money with less risk than I am willing to accept with options trading.
Here is the list of what I like about penny stock trading.
Penny Stock Trading Likes
I like the following things about penny stock trading:
With penny stock trading the thing that I like most about it is that the price per share is so low that it is like it is highly leveraged. Because of that, it takes less money, and I can make a lot more profit than if I trade regular stocks, if I go about it right.
They move very fast so I can get in and out quickly.
They are equities so, unless I pick a “bummer,” they don’t expire. I call companies where the price collapses “bummers.” Bummers occur for a variety of reasons but in all cases the price will collapse.
Penny Stock Trading Dislikes
And, here’s what I dislike about penny stock trading:
You need to really watch them right after you buy them, especially if one of the better online services recommends them. This is because when there is a lot of marketing activity and buzz it can dry up quickly and the price can collapse if there was a lot of pre-announcement position-taking. It’s the old adage: “Buy on rumor, sell on news.”
Most penny stock price moves finish within a day. Much of the time you will have an opportunity to get out at a profit on the second day but not always.
They require much more research than my options trading business.
Getting the timing right is difficult, sometimes.
I need to wait 3 days to use the money from the sale of a position before I can enter a new position.
Here’s My Net
For me, the options versus penny stocks question nets out to two things.
First, the fact that penny stocks don’t expire like options is a very major issue for me. I can’t tell you how many times I have gotten “locked-in” to a bad option position and had to liquidate because I couldn’t take the chance that they would continue to deteriorate in value. Or worse, I got locked-in and the option expired worthless.
Second, the fact that good research protects me is a good thing because I combine it with my penny stock trading rule about always getting out if it goes negative for even a moment (from a price, not a commission standpoint). I suppose that I could get whip-sawed but it has never happened to me.
Penny stocks tend to go up and then down or they don’t do anything or they go down. They rarely go down and then back up if you get your timing right.
For me, the fact that penny stocks don’t expire is absolutely major. That way, even if I get “locked-in” to a position, I won’t lose my investment because of passing some arbitrarily fixed date.
Plus, I’m very busy most days and don’t have a lot of time for research or timing determination. My solution was to outsource the research and the timing determination functions. So, I opted to buy a full, life-time membership in Penny Stock Prophet for $97 USD to solve the problem.
That way, the research and timing determination is done for me by someone who is very good at what he does and is correct way more than he is wrong.