Use Options to Supersize Your Penny Stock Gains

Options can be scary investments – with volatile price movements, a finite lifetime, and scores of expiration dates and strike prices, it’s no surprise that novice investors avoid these instruments like the plague.

But when used intelligently, options can significantly increase a trader’s profitability by magnifying stock gains while limiting risk to your initial investment (unlike traditional leverage, which can actually leave you owing money).

Many people don’t realize that options can actually be traded on tiny companies, but when used with penny stocks, options can provide some truly supersized gains.

Here’s a real-world look at how using options on a recent trade could have put 100% gains in your pocket this month…

The trade I’m talking about isn’t some hypothetical example, though. It’s a real trade that I recommended to Penny Momentum Trader readers back in the last week of November. Now that my premium readers have booked their gains, I wanted to share exactly how we caught this swing trade in advance, and how you can do the same.

Back in November, shares of Alaska Communications Systems Group (NASDAQ: ALSK) popped up on our radar. The small-cap company, which provides communications services in the country’s largest state, had been locked in an uptrending channel for the last several months. An uptrending channel is a technical analysis pattern that binds a stock’s price movement in an upward range – in ALSK it looked like this:

As you can see, the black lines at the top and bottom of the chart’s price action acted as a sort of price ceiling and price floor for shares of ALSK, and with the stock just starting to make another bounce off of support that day, we jumped on board, buying shares on November 24.

Because the stock was in a trend channel, we had a pretty well defined price target: the upper black line. If the trade played out as planned, we’d have expected gains of around 10%. But we also opted to buy options to maximize our gain potential.

I recommended buying the January 2011 $10 Calls on ALSK for 65 cents, contracts that gave us the option to buy shares of the company for $10 if we held to expiration. With shares already at $10.43, we were only paying a tiny premium on the options, but had significant upside if our trade panned out as planned.

And it did… Here’s what ALSK’s chart looked like after the trade, with our same trend lines drawn in:

While the stock gained around 10% during our holding period – nothing to scoff at in less than a month – our options trade ultimately rocketed to $1.30 by the time my sell alert reached Penny Momentum Trader subscribers’ inboxes; a 100% gain in 20 days.

So, how can you easily make similar trades for your own portfolio?

This article originally appeared on PennySleuth.com.