You see, when most people think of penny stocks, they think of one thing: buy tiny companies at extremely low prices and sell high, when these companies are finally discovered by Wall Street. I’ll show you what I’m talking about…

On February 1 this year, O’Reilly Automotive (ORLY: NASDAQ) proposed a buyout of CSK Auto Corp. (CAO: NYSE) for $8 a share. Fortunately for CSK shareholders, their shares had just closed the day before at $5.95. Volume spiked… People went nuts and bought like crazy…

If you had bought just $1,000 worth of shares at the end of trading on January 31, you would have walked away with $580 in pure profits by 12:30 p.m. the next day. This kind of thing shouldn’t shock you. If you are reading this, you already know the enormous potential of these kinds of stocks.

But what would you say if I told you that there was a way you could’ve used that 58% spike to make 500% instantly?

Well, you could have…

You see, people can also buy options on CSK. Options are simply contracts that permits the owner to purchase or sell an asset at a fixed price until a specific date. Meaning, with the added risk of timing the market, the rewards skyrocket.

Take a look at what I mean here…

The same day that CSK’s share price went up 58%, the February $5 calls went from $0.70 per contract to as high as $4.20 per contract. That’s a gain of 500% in just a few hours. And if you had gotten in a week earlier, you would’ve paid just $0.55 a contract and seen a 664% gain!

The same goes for stocks that fall, which we’ve seen plenty of so far this year…

Take a look at radio frequency-components maker, RF Micro Devices, Inc. (RFMD: NASDAQ). In mid-January this year, the company cut its earnings outlook and Wall Street cried bloody murder. Shares fell 25% the day that came out and nearly 44% for the month of January:

If you had $1,000 invested in RF Micro at the beginning of January, you’d be left with only $565 by the end of the month.

Now, if you had bought a handful of RF Micro February 2008 puts at the beginning of the month, it would have cost you only 15 cents a contract. By the end of January, you’d be sitting on contracts worth $1.90 each. That’s a 1,167% gain in one single month!

Hopefully, that answers our dear reader’s question about penny stock options. And the next time we find one like this, we’ll be sure to let you know…

Sincerely,

Jim Nelson
March 14, 2008

P.S.: Unfortunately, we are not market timers. That is key to options trading. Only a select few people in the world have ever been consistently successful at it through the years. We do, however, know of one such person.

And until Monday at midnight, we have something very special for you. Our publisher is giving you the chance to try this options expert out for four months completely free. He does all the hard work. It’ll only take you five minutes a week to see the kinds of profits we mentioned above.

Investing in Penny Stock Options was originally featured in the Penny Sleuth.