As you know, short-term, cheap options are my bread and butter… And this summer has been some of the best trading I’ve ever seen!
But one trade in particular has me reflecting on why even if an options trade goes against me, I never sell when it dips below $0.10.
Let me explain why…
If I need $5 that bad, I shouldn’t be trading!
Back in August, we bought some calls in Nu Holdings Ltd. (NYSE: NU) in Weekly Blitz Alerts. Now, NU is a penny stock, which is anything trading around $5 or lower a share. 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 falling, 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 fallen 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.
Check out the clip up top and let’s talk about why I love to trade cheap call options! Don’t forget you can follow me @LanceIppolito on Twitter, Instagram and our YouTube channel for more trading insights and tips. And as always, you can find me right here talking stocks and options trading — and printing money — on WealthPress.com!
P.S. Earnings can either make or break an account, you know this. And as many traders hide in fear or just simply sit on the sidelines during earnings season… I start salivating… Smelling the massive trade opportunities!
You see, not only has my proprietary “Shadow Blitz” scanner helped me lock in winning trades week in and week out over the past few years… But it’s also proven to THRIVE inside small earnings windows!
Join my live class @ 10 a.m. EDT Saturday, Oct. 15, where I’ll lay out my game plan for earnings next week and how you can be in the best position to trade them!