Today's post is a quickie, addressing a question I've been hearing a lot lately. Picture this: you're bullish on stock XYZ, now trading around $5 bucks (see picture), and you decide to try an options play on it to express that sentiment. Options on such an inexpensive stock are pretty cheap, so you decide to load up a bit more than you usually would. After all, at these prices, you can afford to, right?

Wrong! When your underlying stock price is very low, it's all too easy to get in over your head and buy more leverage than you can effectively wield. I call this the "just a few bucks" rule (hence the punning image above): if the stock costs less than $10 per share and I'm bullish on it, I just buy the stock and forget the options. Why expose yourself to time decay and implied volatility risk when, when the stock is trading for essentially the same price of a ITM option? There are benefits to owning the stock instead of the option. The main one being no time limit dictating when the move has to happen?

It's the old KISS rule -- Keep It Simple, Stupid. (Although let me assure you, if you're suffering from this mistake now, you're far from stupid -- we've all been there before, myself included.)

Regards,
Brian (OG)

[image: The five mule deer bucks by ronjbaer on flickr]

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options.

While implied volatility represents the consensus of the marketplace as to the future level of stock price volatility or probability of reaching a specific price point there is no guarantee that this forecast will be correct.

Any strategies discussed or securities mentioned, are strictly for illustrative and educational purposes only and are not to be construed as an endorsement, recommendation, or solicitation to buy or sell securities.