Can You Buy Options of Penny Stock?

Options of penny stocks are bought and sold like any other stock options contract. The contracts follow the same rules and guidelines and operate in the same ways. As with most financial instruments associated with penny stocks, it is possible to make an investment of less than a dollar per option and multiply your money quickly -- possible, but very rare. Finding buyers and sellers for penny stocks can be more difficult than finding people willing to trade more common shares. Likewise, finding, buying and later selling penny stock options can be difficult.

Options Contracts

A stock option is a contract between a buyer and a seller. The contract states that the holder has the right to buy from (a call option) or sell to (a put option) the person who wrote the contract. The contract specifies the price that the holder can buy or sell stock for (the strike price) and the time frame during which the contract can be used. The holder pays the contract writer for the contract, which becomes its own financial instrument. You can purchase option contracts for many things, including penny stock, as long as you can find a stockholder willing to write the contract.

Penny Stock Options

Penny stock options work exactly like any other type of option, except the contracts are usually cheaper. The penny stock information website Penny Sleuth poses an example in which call options were hovering around 15 cents per share for a $5 per share stock before a merger announcement caused the price to take off. Another difference is that some penny stock options may not be traded on mainstream options exchanges, making transactions more difficult.

Benefits

Penny stocks are risky: the Securities and Exchange Commission guide to microcap stocks, which generally overlap considerably with penny stocks, has as many warnings as market information. Options allow you to buy the possibility to sell if the share price rises, but if the share price falls, you simply let the contract expire and lose cents as opposed to dollars. Similarly, if you have shares of penny stock that you are worried about, you can buy the right to sell at today's price if the share price plummets three or six months from now, which mitigates risk.

Caution

Penny Sleuth warns that success in the options market means having a rare and uncanny ability to "time the market." Option contracts have set prices and expiration dates; to make money, you have to have a decent idea of where the prices are going in the short term. Penny Sleuth states that very few people have the ability to consistently make a profit on options, especially penny stock options.

References

• The Motley Fool: Stock Option
• Penny Sleuth; Investing in Penny Stock Options; Jim Nelson; February 2008
• Penny Sleuth; Use Options to Supersize Your Penny Stock Gains; Jonas Elmerraji; December 2010
• The Motley Fool; Why We Love Wild Penny Stocks; Tim Hanson, Brian Richards; February 2008
• Securities and Exchange Commission; Penny Stock Rules; April 2008
• ecurities and Exchange Commission; Microcap Stock: A Guide for Investors; August 2004