Finding Hidden Gem Penny Stocks with Unusual Options Activity
Penny stocks, defined as equities under $5 per share, offer huge upside potential but also higher risk. Savvy traders look for signals from options activity to identify promising penny stocks poised for gains. This article explores strategies to find overlooked penny stocks based on unusual options volume or flow.
Screen for Liquid Names First
Focus on penny stocks with sufficient daily volume and options interest to allow opening and closing positions easily. Thinly traded penny names often lack the liquidity needed for reliable options trading signals. Use sites like Yahoo Finance to check average volume over 20 and 50 day periods. Look for stocks with at least 500,000 shares changing hands daily.
Also inspect recent options volume before digging deeper. Volume under 500-1,000 contracts per day masks whether unusual trades are occurring. Liquid options chains see 1,000+ contracts daily across multiple strike prices.
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Find Outlier Activity in Near Dates
Unusual options flow often occurs in front month expirations as large traders bet on near term upside. Scan volume spikes in options expiring in the next 2-3 weeks as potential trade signals. Avoid stretching to longer dated options where predictive power diminishes.
Inspect for clusters of large trades at ask or bid prices, indicating aggressive buying or selling by institutions. Compare volume levels to previous activity to gauge if new positions are being initiated. Watch for surges at specific strikes rather than scattered buying across the chain.
Target Out of The Money Strikes
Savvy penny stock traders leverage options leverage through buying calls with higher strike prices and puts at lower strikes. These out-of-the-money options offer greater percentage gains if the penny stock moves toward the strike price. Volume spikes on low and high strike prices signal institutions betting on expanded upside/downside price ranges.
In this article we continue the list of penny stocks from our update 5 Penny Stocks To Buy For Under $5 With Unusual Options Action. Will they make it to your watch list before next week & if so, are they the best penny stocks to buy now? You be the judge.
Penny Stocks To Watch
- Sirius XM Holdings (NASDAQ: SIRI)
- Hecla Mining Co (NYSE: HL)
- Lumen Technologies (NYSE: LUMN)
- Tupperware Brands (NYSE: TUP)
- Hanesbrands Inc. (NYSE: HBI)
- Rite Aid (NYSE: RAD)
- JetBlue Airways Inc. (NASDAQ: JBLU)
- WeWork (NYSE: WE)
Sirius XM Holdings (SIRI)
Shares of the satellite radio company have seen plenty of volatility in the stock market recently. Overall, SIRI stock has maintained its higher levels after popping back above the $4.80 mark late last month. The company is set to unveil its “next generation experience” at and industry event early in November. It will showcase the company’s streaming app and upcoming in-car innovations.
If you are looking for unusual options action, SIRI stock is on the list with more than 15,400 contracts traded in the November 17, $8 Call contracts in the stock market today. These out-of-the-money contracts have heated up along with the $6 strike for the same expiration at just over 5,300 contracts.
Hecla Mining Co (HL)
Thanks to inflation and recessionary concerns the “safe haven trade” has gained popularity. In this case, gold stocks and gold mining stocks have gained interest. Hecla is one of the names gaining momentum this month. More specifically, Friday’s action saw HL stock pop over 15% after gaining confidence from Roth MKM analysts.
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The firm upgraded Hecla Mining to Buy and raised its HL stock forecast price target to $4.40. The surge in trading was also accompanied by an uptick in unusual options action. In this case, the October 20, 2023 $4.50 Calls gained most of the interest with more than 1,900 contracts traded as of this update.
Lumen Technologies (LUMN)
If you look at the Lumen Technologies stock chart, you might not be implored to look any further at things like options volume. Generally speaking, the penny stocks has sat in a sideways trend for the last several weeks. However, recent news this week that Akamai Technologies acquired contract delivery contract from Lumen has sparked some attention on LUMN stock. So we took a closer look at the options activity and came to find out, there was an uptick in the November, 17 $2 Calls.
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Dig Into Potential Catalysts
Do not assume unusual options action alone guarantees future stock gains. Research potential catalysts for large bets like earnings, clinical trials, product launches or analyst ratings changes. Beware excessive hype around thinly traded penny names.
Penny stocks with high short interest frequently squeeze higher on good news. Unusual call option activity may signal some traders anticipating short covers driving prices higher in the near term.
Vet Company Financial Condition and Valuations
Even with bullish options activity, only trade penny stocks with solid balance sheets and reasonable valuations. Avoid names with bloated or negative earnings multiples. Debt levels, cash runway and executive compensation also require scrutiny when selecting penny stocks to watch.
Review SEC Filings and Company Information
Ultimately, pick penny stocks to trade based on your own research into the company’s business model, products, financials and leadership. Options flow simply aids in identifying hidden gems other traders may be overlooking at the moment.
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Exercise Patience Entering and Exiting
Resist the urge to chase unusual options action in real time. Monitor potential trades for a few days to determine if activity is more than a short term anomaly. Be patient entering positions on pullbacks. Set upside/downside targets and stick to them when momentum shifts.
Savvy traders can gain an edge spotting promising penny stocks by adding unusual options activity to their screening process. But fundamental due diligence remains essential to verify upside potential and avoid chasing false signals. Use options flow as an additional tool rather than the entire rationale when selecting overlooked penny stocks likely to post outsized gains.
