As you know, short-term, cheap options are my bread and butter… And this summer has been the best trading I’ve ever seen!
But one trade in particular has me reflecting on why even if an options trade falls, I never sell when it dips below $0.10.
Let me explain why…
If I need $5 that bad, I shouldn’t be trading!
We bought some calls in Nu Holdings Ltd. (NYSE: NU) in Weekly Blitz Alerts on Aug. 8 and Aug. 9. Now, NU is a penny stock, which is anything trading around $5 or less. That means cheap call options. And in this case, I picked some up for around $0.30.
But what happened next was not for the faint of heart…
Trading Cheap Call Options Requires Diamond Hands
Right out of the gate, the stock fell after the company was downgraded, and as those options hit $0.15, I figured what the hell, and bought a few more contracts because earnings were coming up.
But it just kept going, all the way down to just $0.05. That’s $5 for a whole contract… talk about cheap!
By Monday morning the following week, the stock had rallied about 10% ahead of its earnings report.
Now, what else happens ahead of earnings? Volatility increases. And when volatility increases, so does the value of the options.
By Tuesday, the stock was up another 12% on a revenue beat — so that’s 22% in just two days! Those same options that were all the way down to $0.05 skyrocketed up to $0.40 in value! From where I bought in, averaging my purchases at $0.30 and $0.15, that’s more than a double.
And if you had bought in around $0.05? Now that’s a nice payday!
Think about this for a second…
Let’s say I got scared when those options dropped to $0.15. And by the time they hit $0.05, I closed the position.
Not only would I have lost my initial investment, I’d have missed out on all that potential!
And really, at that point, what would I gain by selling to get back $5, $50 or even $500, depending on how many contracts I bought? That’s chump change…
And if I need the money that bad, I shouldn’t be trading — and I especially shouldn’t be trading short-dated options in volatile penny stocks, which carry more risk!
That’s why I NEVER sell an option that’s below 10 cents. I’d rather roll the dice because you never know.
So if an option drops and I feel myself getting scared… I don’t stare at the screen, I don’t flirt with the sell button. I take a walk and let it ride.
P.S. We thought we’d seen just about everything inside the financial markets…
But this is on a whole new level!
In the past few years, these tiny arrows have made some incredible calls in the stock market…
And now, they’re causing a big stir!