Options versus Penny Stocks

I have been thinking about a potentially very important question in recent days. Are call and put options a better trade then penny stocks ? Or are penny stocks a better trade than call and put options ?

I have come to the firm conclusion in recent days that penny stocks are by far a much better risk reward trade than any call or put option. Think about it. Penny stocks do not have any expiration date and do not suffer any time premium leakage as time rolls on. Penny stocks can be analyzed chart wise for large technical analysis patterns just like regular stocks can. I would say these are the main two advantages.

Options suffer from the loss of time premium as time rolls on so you not only have to be right on the direction but also within the time constraint as defined by the expiration date of the option.

Call and Put options can have horrible bid ask spreads depending on the underlying security and can also move very fast if the stock moves against you. This is also true for penny stocks, but again, it really depends on the penny stock we are talking about. Some penny stocks that are liquid enough actually have decent bid ask spreads and make for a reasonably manageable trading environment. Others are extremely thin, but at least the ones that are thin can actually be analyzed on the chart.

What about penny stock trading leverage versus options leverage ?

The upside and downside leverage of options is clearly large but that benefit is again minimized in my opinion by the time decay and lousy bid ask spread. In the options I have traded over the last few months I would say for the most part there was a clear opportunity to achieve a 100% return with a rare chance of getting more than that.

But I have seen more penny stocks move in 100 to 500 % moves than I have seen options move like that. And the 100 to 500% moves in the penny stocks did not come with the stress of time expiration.

Sometimes there exists penny stock chart setups that go back over 1 or 2 years long and define extremely high reward/risk scenarios. The best penny stock setups are those that cover a large pattern over a long period of time, maintain that pattern and then break out from it. It can lead to 500% to 1000% moves, all without the risk of time decay or expiration dates.

Now don’t get me wrong, I am not saying that penny stocks are a walk in the park and as easy as shooting fish in a barrel. They aren’t. But if someone told me they want to trade either penny stocks or options for the next 10 years I would tell them with zero doubt to stick with penny stocks.

To be honest I am quite surprised that both the pinksheets.com website and the OTC BB main website does not market penny stocks competitively against the whole options industry. Think about all the business they could siphon off of current and potential options traders which represents huge potential dollar volume.

You don’t have to agree with me on this one, but I think it is a very interesting comparison. Keep in mind though that I am comparing the buying or selling of call or put options to penny stocks. I am not talking about all the complicated and more sophisticated options strategies out there.

Feel free to comment on whether you agree or disagree with my points.

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