Posted on 18 August 2011.
Trading penny options that derive their value based on the underlying value of a stock can be a powerful trading tool that stock market traders and investors can use to profit in the stock market from price action moves in stocks. Trading penny options, as opposed to options that trade in nickel or dime increments, can also save stock market traders and investors a lot of money on their options trades. If you do not understand how to trade options or how options work, it is a good idea to read Option Trading Basics and Trading Call Options before proceeding with this article on trading penny options.
Penny options are technically known as Penny Priced Options (PPOs) on Wall Street. Traditionally, options on stocks have traded in nickel or dime increments, which is the spread between an option’s bid and ask. While nickels and dimes might not sound like a big spread, options traded with penny spreads can offer substantial savings for stock market traders and investors that trade options. Trading options priced in penny increments offers a 80% savings over options priced in nickel increments and a 90% savings over options priced in dime increments. These savings add up when options are traded regularly, and can increase options trading profits for successful options traders.
Trading options priced in penny increments provides traders and investors an additional advantage since it reduces the price that a holder of an option needs the underlying stock to reach to make money on an options trade before the option expires. This is because of the reduction in price that the penny option was brought at and the higher price that the penny option can be sold for upon completion of the trade reduces the break-even level for a stock option trade.
Trading options in penny increments started as a pilot program in 2007 that only included options associated with thirteen stocks. Since then, trading penny options has expanded to options associated with many additional well known stocks, but penny increment options still do not include all of the stock options that trade. To facilitate trading penny options, many online brokers now offer options trading in penny increments.
Those who wish to start trading penny options as part of their investing and trading strategies are encouraged to learn which stock options can be traded in penny increments and learn about the options market and the various ways options can be traded.
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