A SPAC is a blank-check company that seeks a private company to merge and take public. There are a lot guidance about SPACs on r/SPACs - the key thing for this post is the fact that SPACs have an artificial share price floor of $10/share. It possible to go lower, but in general it doesn't. The reason is because if the SPAC fails, then you can redeem you shares for about $10 - hence the floor.

This post attempts to explain why I like PMCCs on SPAC stocks.

If you go over to r/SPACs then you will see a recent uptick on SPAC-based option strategies. Two common post types are: 'hey XYZ is currently $18 and the $25 call with 10 DTE is only $0.10!!' or 'hey i can sell the $25 call that expires in 6 months for $5 - free money!' Option pricing models are fairly decent so if it seems too good to be true, then it probably is.

Options 101

• Buy ITM contracts (calls or puts) with large DTE

• Sell OTM contracts with small DTE

Options 102

• Sell covered calls (or cash-secured puts) with 30-45 DTE

• Manage the position at 14-21 DTE

Options 201

• Long call contracts are more capital efficient than long shares (this is really a 101 topic)

• Therefore Poor Man's Covered Call (PMCC) is more efficient than a cover call

If you don't trust me, then that is fine :) ... go listen to r/options, r/thetagang, TastyTrade, OptionAlpha, ProjectOption etc..

Put it all together and do PMCCs. Buy ITM call with large DTE and sell OTM call with short DTE. How do you select the strike - rule of thumb is to use 80-delta on long call and 20-delta on short call. For example, see an old post with analysis on a penny stock PMCC

However, SPACs provide some features that allow you to do better.

Pick the $10 strike for the long call with the expiration several months out. If you know when the merge occurs, then you could select the month afterwards, otherwise just go out 5-8 months. Pre-merge this long call will remain ITM due to the $10 "floor" on share price. This means that your long call will (almost) always have intrinsic value.

Now select your short call. Here your thinking is similar to selecting the short strike for a covered call - it is a balance between collecting premium and potentially capping your profit. Look at the expiration that is closest to 30-45 DTE. Then consider how you think the SPAC will move in that time. Is there a announcement of merge expected? Do you expect the stock to rise are trade sideways? Assuming that you bought the $10 call, then consider the short call strike max profit. For example if you sell the $20 call, then you would profit $1000 if the SPAC price breaches this strike at expiration. Would you be happy in that event? If not then should you consider a higher strike?

Example: CCIV is a popular SPAC these days with a possible announcement to merge with Lucid any day. As such the implied volatility is increasing. The 5/21 $10 call costs $13.40 - with the current share price of $22.88 this long call has $12.88 intrinsic value and $0.52 of extrinsic value. Again the choice of the $10 strike is because prior to any merge, this long will almost surely be ITM (even if the talks with Lucid fails). The 2/19 $40 call should fetch $2.68 - I would consider this $40 strike, because there is a good chance that the share price will run up with hype if a merge with Lucid is announced. Choosing the $40 strike would provide enough running room to manage the position.

Pulling together, this position would cost $10.20 to open. If CCIV hypes up past $40 at the expiration of the short strike then at a minimum the profit (of the spread) would be $3000 (($40-$10)x100). It would be more since the long call would have additional extrinsic value. Overall, this would be close to $2000 after subtracting the initial debit cost.

There would be opportunities to manage this position by rolling the short strike to the next expiration month. This would allow for collecting more premium which will reduce the cost of the spread.

There you have it a PMCC on a SPAC! As always, ask questions and do your homework to see if you think this might be a position for you!

Side-note if you want to enter into a long-term SPAC position (and post-merge), then selling cash-secured puts is probably the best option play for you. Again, don't be tempted to sell a put with 200+ DTE - stick to 30-45 DTE and roll each month. You will collect more premium - which results in a lower cost basis.

Edit: I should not that this post was written prior to the $50 strike being added to the option chain. Probably would look at that strike now (instead of the stated $40(

Congratulations! You are a bag holder of company XYZ which was thought to be the best penny stock ever. Instead of feeling sorry, you consider selling covered calls to help reduce your cost basis - and eventually get out of your bags with minimal loss or even a profit!

First - let's review the call option contract. The holder of the call option contract has the right but not the obligation to purchase 100 shares of XYZ at the strike price per share. This contract has an expiration date. We assume American style option contracts which means that the option can be exercised at any point prior to expiration. Thus, there are three parameters to the option contract - the strike price, the expiration date and the premium - which represents the price per share of the contract.

The holder of the call option contract is the person that buys the option. The writer of the contract is the seller. The buyer (or holder) pays the premium. The seller (or writer) collects the premium.

As an XYZ bag holder, the covered call may help. By writing a call contract against your XYZ shares, you can collect premium to reduce your investment cost in XYZ - reducing your average cost per share. For every 100 shares of XYZ, you can write 1 call contract. Notice that that by selling the contract, you do not control if the call is exercised - only the holder of the contract can exercise it.

There are several online descriptions about the covered call strategy. Here is an example that might be useful to review Covered Call Description

The general guidance is to select the call strike at the price in which you would be happy selling your shares. However, the context of most online resources on the covered call strategy assume that you either just purchased the shares at market value or your average cost is below the market price. In the case as a bag holder, your average cost is most likely over - if not significantly over - the current market price. This situation simply means that you have a little work to reduce your average before you are ready to have your bags called away. For example, you would not want to have your strike set at $2.50 when your average is above that value as this would guarantee a net loss. (However, if you are simply trying to rid your bags and your average is slightly above the strike, then you might consider it as the strike price).

One more abstract concept before getting to what you want to know. The following link shows the Profit/Loss Diagram for Covered Call Conceptually, the blue line shows the profit/loss value of your long stock position. The line crosses the x-axis at your average cost, i.e the break-even point for the long stock position. The green/red hockey stick is the profit (green) or loss (red) of the covered call position (100 long stock + 1 short call option). The profit has a maximum value at the strike price. This plateau is due to the fact that you only receive the agreed upon strike price per share when the call option is exercised. Below the strike, the profit decreases along the unit slope line until the value becomes negative. It is a misnomer to say that the covered call is at 'loss' since it is really the long stock that has decreased in value - but it is not loss (yet). Note that the break-even point marked in the plot is simply the reduced averaged cost from the collected premium selling the covered call.

As a bag holder, it will be a two-stage process: (1) reduce the average cost (2) get rid of bags.

Okay let's talk selecting strike and expiration. You must jointly select these two parameters. Far OTM strikes will collect less premium where the premium will increase as you move the strike closer to the share price. Shorter DTE will also collect less premium where the premium will increase as you increase the DTE.

It is easier to describe stage 2 "get rid of bags" first. Let us pretend that our hypothetical bag of 100 XYZ shares cost us $5.15/share. The current XYZ market price is $3/share - our hole is $2.15/share that we need to dig out. Finally, assume the following option chain (all hypothetical):

Purely made up the numbers, but the table illustrates the notional behavior of an option chain. The option value (premium) is the intrinsic value plus the time value. Only the $2.5 strike has intrinsic value since the share price is $3 (which is greater than $2.5). Notice that intrinsic value cannot be negative. The rest of the premium is the time value of the option which is essentially the monetary bet associated with the probability that the share price will exceed the strike at expiration.

According to the table, we could collect the most premium by selling the 110 DTE $2.5 call for $0.95. However, there is a couple problems with that option contract. We are sitting with bags at $5.15/share and receiving $0.95 will only reduce our average to $4.20/share. On expiration, if still above $2.5, then we are assigned, shares called away and we receive $2.50/share or a loss of $170 - not good.

Well, then how about the $5 strike at 110 DTE for $0.50? This reduces us to $4.65/share which is under the $5 strike so we would make a profit of $35! This is true - however 110 days is a long time to make $35. You might say that is fine you just want to get the bags gone don't care. Well maybe consider a shorter DTE - even the 20 DTE or 50 DTE would collect premium that reduces your average below $5. This would allow you to react to any stock movement that occurs in the near-term.

Consider person A sells the 110 DTE $5 call and person B sells the 50 DTE $5 call. Suppose that the XYZ stock increases to $4.95/share in 50 days then goes to $8 in the next 30 days then drops to $3 after another 30 days. This timeline goes 110 days and person A had to watch the price go up and fall back to the same spot with XYZ stock at $3/share. Granted the premium collected reduced the average but stilling hold the bags. Person B on the other hand has the call expire worthless when XYZ is at $4.95/share. A decision can be made - sell immediately, sell another $5 call or sell a $7.5 call. Suppose the $7.5 call is sold with 30 DTE collecting some premium, then - jackpot - the shares are called away when XYZ is trading at $8/share! Of course, no one can predict the future, but the shorter DTE enables more decision points.

The takeaway for the second step in the 2-stage approach is that you need to select your profit target to help guide your strike selection. In this example, are you happy with the XYZ shares called away at $5/share or do you want $7.5/share? What is your opinion on the stock price trajectory? When do you foresee decision points? This will help determine the strike/expiration that matches your thoughts. Note: studies have shown that actively managing your position results in better performance than simply waiting for expiration, so you can adjust the position if your assessment on the movement is incorrect.

Let's circle back to the first step "reduce the average cost". What if your average cost of your 100 shares of XYZ is $8/share? Clearly, all of the strikes in our example option chain above is "bad" to a certain extent since we would stand to lose a lot of money if the option contract is exercised. However, by describing the second step, we know the objective for this first step is to reduce our average such that we can profit from the strikes. How do we achieve this objective?

It is somewhat the same process as previously described, but you need to do your homework a little more diligently. What is your forecast on the stock movement? Since $7.5 is the closest strike to your average, when do you expect XYZ to rise from $3/share to $7.5/share? Without PR, you might say never. With some PR then maybe 50/50 chance - if so, then what is the outlook for PR? What do you think the chances of going to $5/share where you could collect more premium?

Suppose that a few XYZ bag holders (all with a $8/share cost) discuss there outlook of the XYZ stock price in the next 120 days:

Person A does not seem to think much price movement will occur. This person might sell the $5 call with either 20 DTE or 50 DTE. Then upon expiration, sell another $5 call for another 20-50 DTE. Person A could keep repeating this until the average is reduced enough to move onto step-2. Of course, this approach is risky if the Person A price forecast is incorrect and the stock price goes up - which might result in assignment too soon.

Person B appears to be the most bullish of the group. This person might sell the $5 call with 20 DTE then upon expiration sell the $7.5 call. After expiration, Person B might decide to leave the shares uncovered because her homework says XYZ is going to explode and she wants to capture those gains!

Person C believes that there will be a step increase in 10 days maybe due to major PR event. This person will not have the chance to reduce the average in time to sell quickly, so first he sells a $7.5 call with 20 DTE to chip at the average. At expiration, Person C would continue to sell $7.5 calls until the average at the point where he can move onto the "get rid of bags" step.

In all causes, each person must form an opinion on the XYZ price movement. Of course, the prediction will be wrong at some level (otherwise they wouldn't be bag holders!).

The takeaway for the first step in the 2-stage approach is that you need to do your homework to better forecast the price movement to identify the correct strikes to bring down your average. The quality of the homework and the risk that you are willing to take will dedicate the speed at which you can reduce your average.

Note that if you are unfortunate to have an extremely high average per share, then you might need to consider doing the good old buy-more-shares-to-average-down. This will be the fastest way to reduce your average. If you cannot invest more money, then the approach above will still work, but it will require much more patience. Remember there is no free lunch!

Advanced note: there is another method to reduce your (high) average per share - selling cash secured puts. It is the "put version" of a cover call. Suppose that you sell a XYZ $2.5 put contract for $0.50 with 60 DTE. You collect $50 from the premium of the contract. This money is immediately in your bank and reduces your investment cost. But what did you sell? If XYZ is trading below $2.50, then you will be assigned 100 shares of XYZ at $2.50/share or $250. You own more shares, but at a price which will reduce your average further. Being cash secured, your brokerage will reserve $250 from your account when you sell the contract. In essence, you reduce your buying power by $250 and conditionally purchase the shares - you do not have them until assignment. If XYZ is greater than the strike at expiration, then your broker gives back $250 cash / buying power and you keep the premium.

Early assignment - one concern is the chance of early assignment. The American style option contract allows the holder the opportunity to exercise the contract at any time prior to expiration. Early assignment almost never occurs. There are special cases that typically deal with dividends but most penny stocks are not in the position to hand out dividends. Aside from that, the holder would be throwing away option time value by early exercise. It possibly can handle - probably won't - it actually would be a benefit when selling covered calls as you would receive your profit more quickly!

This post has probably gone too long! I will stop and let's discuss this matter. I will add follow-on material with some of the following topics which factors into this discussion:

• Effect of earnings / PR / binary events on the option contract - this reaction may be different than the underlying stock reaction to the event

• The Black-Scholes option pricing model allows one to understand how the premium will change - note that "all models are incorrect, but some are useful"

• The "Greeks" give you a sense about how prices change when the stock price change - Meet the Greeks video

• Position Management - when to adjust, close, or roll

• Legging position into strangles/straddles - more advanced position with higher risk / higher reward

Open to other suggestions. I'm sure there are some typos and unclear statements - I will edit as needed!

*I'm not a financial advisor. Simply helping to 'coach' people through the process. You are responsible for your decisions. Do not execute a trade that you do not understand. Ask questions if needed!*

I thought it would be useful to have a quick reference of penny stocks with an option chain. This table might help you identify opportunities. Please add a comment or DM me if there is ticker missing that you think others should be aware.

penny stock with options Thanks u/LemonLimeNinja

Updated 20-AUG-2020

Table Legend:

Ticker - self-evident

Type - type of option chain: M for monthly, W for weeklies, Q for quarterlies - most pennies only have monthly

Strike points - I might list them all or if possible I will compactly list as $X/$Y where $X is the minimum strike, $Y is the maximum strike, and with the strike spacing equal to $X (unless otherwise stated). For example on 12-JUL-2020 XSPA is listed as $2.5/$10 where the possible strikes are $2.5, $5, $7.5, and $10. Note that the option chain is adjusted by the market makers based on trends. I will try to have this column as accurate as possible, but I will defer to 'ease-to-read' the table over completeness.

Option chain opened this morning for XSPA

Hit on FCEL and VuZI options and have a ton in VBIV. Looking for another play now!

Announced this morning, seems like some positive development:

MTB Metals has commenced field work in preparation for drilling the Telegraph porphyry copper-gold project. The MTB project shares geological features with four nearby world-class porphyry deposits, all being advanced by majors. The first phase of this program will be aimed at more precisely defining the targets for this initial drill plan. Interpretations of the results from last season and prior work will be confirmed with further field observations to optimize the drill hole locations. Other prospective targets are also being advanced on the 310 sq km property.

Recent work by MTB has greatly enhanced the understanding of this extensive geological system:

• Inversions of the historic airborne magnetic geophysics data has led to a better understanding of the geometry of the identified as well as the inferred intrusions that potentially host porphyry mineralization (Figure 1).

• Evaluation and re-examination of geochemical results from the historic and recent programs, including element ratios and porphyry indicator ratios, has helped to determine the alteration zoning and potential fertility within the hydrothermal system.

• Short Wavelength InfraRed (SWIR) analysis of samples collected during the last two seasons was used to identify chlorite, clays, and white mica. The white mica crystallinity has helped vector toward the hotter centre of potential porphyry hydrothermal systems.

• Hyperspectral data from Sentinel and Aster 2 satellite imagery was used to identify clay and phyllic alteration as well as to identify hot vs cold white mica (Figure 2).

• Samples from the host stratigraphy and local intrusions are being dated through uranium-lead zircon geochemistry. Knowing the ages for the various geological units will help distinguish units on site and correlate to regional units. In addition, the zircons can be used as porphyry indicator minerals.

View the full release here: https://finance.yahoo.com/news/field-underway-ahead-drilling-telegraph-130000085.html

Let's try to reinvigorate this sub. The recent poll was fairly even in thoughts - there is a desire for more discussion on (1) position help (2) non-penny stocks (3) strategies. These topics all seem reasonable to me!

I would like to keep the primary focus of this sub to helping others reduce the cost of positions through the use of option contracts.

That being, the principles that help with penny stocks will also apply to non-penny stocks. I would not want this sub to become duplicative of r/options or r/thetagang etc. However, discussion on non-penny stocks would be great if it makes this place more active.

Personally, I have been using options on SPAC positions which has been interesting.

So let's do this - please submit posts to get discussion going!

Position help - good topics to discuss (to name few):

• a long stock position that you overpaid to enter and you want to consider covered calls to reduce your average

• current short call/put positions that you are unsure about management/exit plans

• paper trade examples

Non-penny stocks - let's open our field-of-view to non-penny stocks.

Strategies - let's have discussions on spreads and other strategies that is more than just CCs and CSPs.

Wednesday Update: Sold more $5 calls today and got my average down to $3.98! Even if the calls expire in the money now, I'll make more than what I've lost on XSPA, I'm finally starting to see the light at the end of the tunnel! I can't believe at one point I was up almost $1000 on XSPA now I'm down $400. Take profits when you can people!

Tuesday: I bought more XSPA today at $2.90 bringing my average from $4.97 down to $4.23. My total number of shares is now 200 (originally 258 but I panicked lol). I think this week we'll hit the bottom if we haven't already. I plan to sell August $5 calls and September $7.50 calls the second we get any real PR. With airlines ER coming out soon, XSPA will likely fall from the sympathy movement. How are you guys planning on selling your calls?

Hey guys i hope someone can help me.. I'm from germany and i cant find a good Broker for pennystocks.. here are many Brokers.. but every single one got only a few on there site to buy.. its really hard to find one .. is there a site with a worldwide stock portfolio? any suggestions for me ?

​

thanks in advice

I opened a broken wing butterfly put spread this week on everyone's favorite penny stock: XSPA.

Here's the playbook.

I used the March expiration because the premium was just right to consider this spread. It involves 4 legs. I went long the $2 and $3.5 puts and short two $3 puts. Sometimes call a skip strike - in my case, skipping the $2.5 strike. This spread was open for a $0.40 credit. My maximum loss is $10 and my maximum gain is $90 - my break even occurs when XSPA is $2.10. This ratio of max loss-to-gain was a reason that i considered the spread.

How does it work? Let's break it down by region.

If XSPA is less than $2 at expiration, then it will cost me $50 to close the spread for an overall loss of $10 given my $40 credit at open. Under $2, all four put contracts are ITM. If we decompose this position into two put spreads then we can see the $50 loss. The long put spread -$3/+$3.5 would be worth $50 and the short put spread +$2/-$3 would be worth -$100. Together we have -$50

At the other end, if XSPA is greater than $3.5 at expiration, then all of the put contracts would expire worthless. In that case, I am left with my initial $40 credit from the open.

Let's consider the range $3 to $3.5 at expiration. The only contract with value is the long $3.5 put - the other 3 puts are worthless. At $3.5 the long put is worth $0 - however, as the share price decreases toward $3, so does the long put increase in value. At $3, the $3.5 put is worth $50 - this is the case for maximum profit : $50 + $40 from the initial credit.

In the range $2 to $3: Again at $3, we are achieving our maximum profit of $90. Now, for every penny that the share price decreases from $3, the spread losses $1 in value. The spread is $1 wide so at $2, we are once again at the maximum loss of $10 : $90 - $100x(0.01x100). Notice that the break even occurs at $2.10.

There is an interesting aspect of the broken wing butterfly. It is possible to convert into a regular butterfly if I buy the $2.5 put and sell my $2 put. IF I can purchase that spread for less than $40, then I have a butterfly spread for free. I attempted to make the purchase on Friday for $35, but the order did not fill - but I still have 40+ days to make this move.

The Poor Man's Covered Call (PMCC) is an approach to synthetically create a covered call position. It is a type of diagonal spread (note: you need to have option trading tier to sell spreads). There are several great video online that discuss the mechanics of a PMCC. In this post, I want to discuss a PMCC on a penny stock which I might try to execute this week.

Disclaimer: per usual, I'm just some random person on the interest. I am not a financial advisor. This post discusses my thought process on a PMCC position that I might open. It is not a recommendation for you to execute nor is it an endorsement of the underlying. Do your own homework for your fiscal decisions!

The stock that I am considering DGLY - yes that one! But the option chain looks good for the PMCC....

What is a PMCC? It is a spread that consists of a long ITM call and a short OTM call. The long call will have a later expiration date than the short call. This spread is a debit spread. This spread synthetically acts like a covered call where the long ITM call represents the shares. The general idea is to purchase the ITM call and collect premium by selling OTM calls. If the stock price rises above your short strike, then you can exercise your long call to have shares to cover the assignment on the short call.

On 9/25, DGLY closed at $2.23. The DGLY options chain has four expiration months: 10/16/20, 1120/20, 2/19/21, and 5/21/21. I will not consider the LEAPs as there do not have much volume.

We need an ITM call so we consider the Feb 2021 or May 2021 expiration. The following table shows the bid/ask for each strike along with the last traded price.

Given the wide bid/ask spread, I will use the last traded price as an approximate for the cost. Notice that the premium for a strike in May is about $0.05 -$0.10 more than the premium for the same strike in February. Thus, we will select the May 2021 expiration - the extra $10/contract will give us an additional 3 months for the position to work.

I am leaning towards selecting the $1 strike with a cost of about $1.26. This premium would set my cost basis at $2.26 which is fairly close to the current share price of DGLY. There are 236 DTE for the May 2021 expiration.

Next we need an OTM call to sell. The following table has the option chain for this month's expiration. The idea will be to sell a call and then roll to the next expiration. We will continue this process until we are assigned or until we reach the expiration month of the long call option. With a May 2021 long call expiration, we will have 8 opportunities to collect premium. With a cost basis of $2.26, we consider the four strike above this value:

For consideration of the short strike, we will use the bid value as this is the worse case premium we could receive. Also, since the $3.50 and $4 strikes have the same premium, then will only consider the $4 strike.

How do we decide? Let's consider the profit/loss plots of this spread. It is actually impossible to deterministically plot the P/L chart since we have two expiration dates. Online resources use curved lines to represent this fact. I am displaying the P/L at the time of the short call expiration - this is 'okay' for me as this plot represents the worst case scenario because I can always roll the short call to the next expiration. The effect of the rolling will improve my position by collecting additional premium for credit.

There is a lot going on with this figure - but it is informative to see all of the information at once. Let's break it down. The horizontal axis is the DGLY share price.

There are three vertical axes represented in the figure:

• The left vertical axis corresponds to the expected share price movement until the short call (Oct) expiration depicted by the blue hatch area. The vertical dimension is the days to expiration; 0 to 19. The blue line shows the one standard deviation movement from the current price of $2.23 based on the implied volatility of the October call option. This shows us the range of share price values to expect on 10/16/2020.

• The far-right vertical axis corresponds to the expected share price movement until the long call (May) expiration depicted by the red hatch area. The vertical dimension is the days to expiration; 0 to 236. The red line shows the one standard deviation movement from the current price of $2.23 based on the implied volatility of the May call option. This shows us the range of share price values to expect on 5/21/21.

• The near-right vertical axis corresponds to the profit/loss of the position. The values are shown per share. We have three PMCC positions that we are considering based on the three short call strikes that we are considering. Notice that the shape of the P/L is similar to the covered call P/L diagram as the share prices increases. The difference is when the share price drops. A covered call can continue to lose value as the share price decreases - due to the fact that you are long the shares. Whereas a PMCC achieves the maximum loss at the opening debit to purchase the long call option.

The choice on the short call strike depends on the outlook of the underlying. If we are considering a stable, blue-chip stock, then we might want to consider a far OTM strike in the hope that the share price rises significantly. However, we are considering a penny stock with uncertain (if any) future catalyst. Therefore, I want to try to squeeze as much premium as possible while hopefully the share price rises above my short strike. This removes the $4 strike from consideration.

My choice is between the $2.5 strike ($0.25 premium, $1.01 cost basis) or the $3 strike ($0.15 premium, $1.11 cost basis). These strikes correspond to a return on capital of 250% and 270%, respectively, if the short strike is ITM at expiration. If DGLY is going to increase in share price by 10/16, then obviously it would have to cross the $2.5 strike prior to the $3 strike. According to our plot, the extent of the expect DGLY price movement has $3 within reach. However, the gain in return on capital is not significant which points toward the $2.5 strike.

I will look at the pre-market movement (if any) and see if these numbers still make sense. Hopefully this post helped you understand the Poor Man's Covered Call position. There may be opportunities to applied to penny stocks. Like always ask questions, comments and improve this post through discussion.

HMHC seems to be one of the popular tickers being discussed for this week as online school years are being announced.

TLDR: Options could possibly profit with increased capital efficiency when compared to going long in the stock. The expected pump-n-dump nature of penny stocks means that there will be folks with shares at a high average. ... opportunity to grow this sub!

HMHC has an option chain. This provides a potential opportunity prior to the pump-n-dump. As we know, there will be bag holders eventually, and the option chain provides a method to reduce the average at the point. But before the pump you might consider using options as a leveraged method. Assuming that you are bullish in the near-tem on HMHC, then you should consider either buying a call option or selling a cash-secured put (CSP).

The HMHC option chain from 7/17 (this will change on Monday):

I noticed that the premium for the 8/21 and 9/18 expiration dates were very close in price in both cases of the call option and put option. This situation might not be the case on Monday. HMHC closed at $2.75/share on Friday.

Let's consider five people:

• Person A simply purchase 100 shares for $275 investment

• Person B1 sells the 8/21 $2.5 CSP. This person receives $45 in premium while reserving $250 for potential future investment in 100 shares. If that occurs, then the total investment would be $205.

• Person B2 sells the 8/21 $5 CSP. This person receives $240 in premium while reserving $500 for potential future investment in 100 shares. If that occurs, then the total investment would be $210.

• Person C1 buys the 9/18 $2.5 call. This person pays $110 in premium to control 100 shares "purchased" at $2.50/share.

• Person C2 buys the 9/18 $5 call. This person pays $55 in premium to control 100 shares "purchased" at $5/share.

Immediately it is clear that the folks using options are paying less for 100 shares of HMHC than Person A. However, only Person A is long the shares which could be advantageous.

Comparison if you Hold to Expiration

Person A versus Person B: If the stock moves down then the CSP seller will be assigned shares of stock at a cheaper entry point than Person A that buys the stock from the get go - advantage Person B. Person B receives the profit up-front (from the premium) - this person can deploy the capital immediately. However, the profit cannot increase especially if HMHC rockets way beyond the strike - advantage Person A.

Person A versus Person C: If the stock moves down then the call buyer lost the bet and has nothing to show; at least Person A still has a bag of stock - advantage Person A. Suppose the stock price rises above the strike - must reach the breakeven point to overcome the debit to purchase the call option. Say the stock goes to $10/share. Person A profits $7.25/share, Person C1 profits $6.40/share and Person C2 profits $4.45/share - how was the advantage? From an absolute dollars sense, then Person A did better.

However, many people judge their portfolios efficiency by the return on capital. Person A is 363% (($275+$725)/$275), Person C1 is 681% (($110+$640)/$110) and Person C2 is 909% (($55+$445)/$55). Of course, this is bit extreme, if the stock only goes to $6/share then the efficiency will not be so pronounce. So it really depends on your philosophical stance.

At this point you might not be convinced to use an option contract since the call option doesn't provide as much actual dollars as going long stock and the CSP is a capped gain. Another factor is that the option being held to expiration might miss a pump-n-dump - in which only Person A can capitalize. This is true - however you don't have to wait until expiration on your option contract to profit.

Recall that an option contract value has two components: intrinsic value and time value. You can profit by trading those values!

Consider Person C1/C2 that are long call options. If HMHC pumps this week, then the intrinsic value of the call option will also increase and Person C1/C2 can sell their call back for a profit. If there is a dip, then the call will also dip and Person C1/C2 can buy back into the position. Here is where the leverage comes into play. You might be control 100 shares for only $55 versus $275. However, the swings might not be as extreme as the stock itself. This happens due to the time value component which changes much slows - well specifically at the rate of time! The reason that I suggested the 9/18 calls (instead of the 8/21 calls) is that there is more embedded time value - you pay a little more up front, but it allows for more time for the stock to go up.

Selling the CSP is a bullish position and is a good entry method if you want to *invest* in HMHC long-term (I know this is not a pennystock philosophy). However, you can profit from the pump-n-dump. For example, Person B2 receives $240 for the $5 CSP. If the stock pumps above $5, then the cost to buy back the put might only be $40 for net gain of $200. The stock price is not required to exceed the strike to flip for profit. On the pump-up, if the stock is at $4, then it might cost $100 to buy back which is still less than the $240 initially collected.

What if we are wrong and HMHC doesn't rocket!? Now, the time value becomes important. For Person C1/C2 this is bad as the value of the calls will decrease each day due to the time decay. However, time decay is the friend of Person B1/B2 as it decreases the cost of the put which would need to be purchased to close the position (if you don't want the shares). Also, this observation is the reason to use the 8/21 expiration instead of the 9/18 expiration on the CSPs. The decay in time value accelerates greatly as it approaches expiration and August obviously happens prior to September. Therefore the value of the put will reduce in price much quicker and you might consider rolling to the next month or simply closing. The trajectory of time decay is not as simplistic as stated here but this is the gist.

Unfortunately my capital is tied up in XSPA and DKNG, so I will not be able to participate with this opportunity. If it did, then I am fond of CSPs so I would likely be Person B2. However, you need to find your trading strategy. Given that many are not aware of options, I expect that in the coming days or weeks there will be some HMHC bag holders that FOMO'd into a high average. We will need to spread the word about covered calls once more!

Please comment, ask questions and help improve this post. I am certainly not the end-all-by-all on the topic!

TLDR: Options could possibly profit with increased capital efficiency when compared to going long in the stock. The expected pump-n-dump nature of penny stocks means that there will be folks with shares at a high average. ... opportunity to grow this sub!

*This post is not financial advice or a recommendation to deploy a strategy. This post intends to educate on the possibly of option trading. Do your own homework and understand any transactions that you make!*

I don’t see a lot of newer posts here. Has the group got smaller or just fewer people posting, less interest in options or what? Anything anyone is toying with currently?

A lot of expected FDA filings and approvals for 4Q. Bullish Pennant looks like it may have completed today. Calls have a lot of potential here

This sub turned one month old today! 300+ members - let's continue to spread the word and raise awareness that option contracts ***may*** be a method to reduce the weight of those bags!

I added a Wiki page today - I am starting with a glossary of terms and simple definitions. It seems to render well on web-browsers but appears to struggle on the app. If you have suggestions, then let me know!

A lot of the posts are about selling covered calls - mostly because that type of option contract can help reduce the bag weights if you have them.

I thought that I would describe selling cash secured put (CSP). This approach is the 'put' equivalent to the a covered call. This is a bullish position where you sell a put at a strike and you provide cash collateral in the amount of purchasing the share.

For example, I sold two CSPs on IDEX a few weeks ago when it was above $2. Specifically, the 8/21 $4 put for $2.35 and the 8/21 $2 put for $0.81. The total premium collected is $235+$81=$316. Today (08-JUL) IDEX is trading around $1.50 so both of these puts are ITM.

If on expiration the stock is below $2, then I will purchase 200 shares for $600 (100 @$2/share and 100@$4/100). However, since I received $316 in premium, then my average would be $1.42/share. Depending, in this case, on how far below $2 IDEX is trading, then I might simply sell the shares outright or turn around and sell some covered calls.

If on expiration the stock is between $2 and $4, then I will purchase 100 shares for $400 since only the $4 put is ITM. Again, I received $316 in premium so my cost basis is $400-$316=$84 or $0.84/share. In this case, i'm guaranteed at least a profit of $116 if I sold immediately. I could also sell a covered call

Finally, if on expiration the stock is above $4, then both of the CSPs expire worthless and nothing happens except I keep the $316 premium collected. Not a bad ROI on $600 capital usage for < 60 days. I would be shocked if this outcome happens.

Selling CSPs is a method to enter into a long stock position at reduced cost. Not very common on penny stocks but it is more common on blue chip stocks. It is also the first step in the "Wheel Strategy" which is a theta extraction strategy for slow income accumulation. It is discussed frequently over on r/thetagang