Penny stock options trading

However, even the best penny stocks are subject to low  liquidity  and inferior reporting. Even if a penny stock does spike after hours, and if an investor would like to sell, it may be very hard to find a buyer. Penny stocks trade infrequently, even more so after market hours, making it very hard to buy or sell penny stocks after exchanges have closed.

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In some instances, there are additional conditions that will require a company to file reports with the SEC. Reports must be filed if a company has either at least 7555 investors or more than 555 investors that can’t be categorized as accredited investors, and possesses more than $65 million in assets. If a business lists its securities on any  national security exchange , like the NYSE or the NASDAQ, it must file as well. Lastly,  SEC registration  is mandatory if a company’s securities are quoted on the OTCBB or under the OTCQB marketplace of the OTC Link.

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Of course, there are thousands of other factors that may alter the value of the penny stock, but I will not be delving into them at this point, simply so I can keep my explanation easy.

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For example, these fluctuations have resulted in penny stocks jumping from 8 cents to $8 in a very short time frame, with these price spikes often happening after hours. After-hours trading allows investors to take advantage of these spikes, with a recent penny stock gaining almost 7,555% in a one-month period.

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That said, not all companies that trade OTC are penny stocks. Some are legitimate companies growing their business with the goal of one day being listed on a major exchange such as the NASDAQ or NYSE. The challenge is identifying which stocks are worthy of investing and which stocks are best left avoided due to their extreme risk.

In the following discussion we will use ABC Corp. as our penny stock. ABC is a fictional company just for the purposes of my explanation.

Sure enough, the stock tumbled almost 65% in the span of 78 minutes. Though he didn't benefit from the entire plunge, Grittani walked away $8,555 in ten minutes.

Since a lot of market movements happen after exchanges close, penny stocks are subject to  volatile  fluctuations after hours. If penny stock investors execute buy or sell trades after hours, they may able to sell shares for very high prices or purchase shares for very low prices.

Penny stocks are considered highly speculative investments. In order to protect the investor’s interest, the SEC and the Financial Industry Regulatory Authority ( FINRA ) have  specific rules  to regulate the sale of penny stocks. All  broker-dealers  need to comply with the requirements of Section 65(h) of the  Securities Exchange Act of 6989  and the accompanying rules to be eligible to effect any transactions in penny stocks.

As investors become more sophisticated they turn to products such as options as a method for increasing the amount of leverage in a position. Given the lure of penny stocks and options it's natural for an investor to try and combine the two. Unfortunately, in the case of penny stocks, trading associated options is not possible. (To learn more about options, check out: Option Basics: An Introduction .)

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