Small cap stocks are companies with a market capitalization of less than $5 billion. By the way, this number is not set in stone by some standard; it’s approximate based on who you talk to. Market capitalization is determined by multiplying the number of shares of stock a company has by the stock price. If this result is less than $5 billion, you’ve got a stock that may be good for short term options trading.
Why? Because short cap stocks tend to be more volatile. You’ll make more profit trading options because options thrive on volatility. Options are leveraged. So, if the stock price of a company goes up 5%, the call option on that company may go up 40%. This ratio of how the stock price change impacts the options price change is known as the delta. And it is different for every company.
Owning a call option gives you the right to buy a stock at a particular price, known as the strike price. With a call option, you don’t actually own the stock, but you do control the stock. If you choose to exercise your option, the person who sold you the call option is required to sell you their stock at the strike price. This puts you in control. In essence, you’ve got the wheel!
So the next time someone tells you that small cap stocks aren’t the best investment because they don’t pay dividends, you’ll know the truth. The amount of money you can make trading options will make dividends look like pennies on the dollar.
All the best to you on your financial journey!
Aneshia
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