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The BIG BAM Trading Theory
Secret #1:
Why Buying on the Cheap is Better
Simply stated: It is much harder for a blue chip stock with a market cap of $280 billion to double its value in a year than it is for a small-cap or mid-size company with a market cap of $1 or $2 billion.
So the first secret to finding Big Audacious Moves is to look at stocks priced under $30.
Secret #2:
Take Advantage of Pricing Inefficiencies on Low-Priced Stocks
Many small-cap and mid-cap stocks are wrongly priced because they do not receive significant coverage by Wall Street analysts - our little secret!
The Wall Street Journal wrote that by "...identifying companies with little analyst coverage that are growing in such a way as to attract more later on, and you're on your way to finding stock bargains." This is the key to our second secret.
Secret #3:
Get Wholesale Option Prices on Low-Priced Stocks
The model used to price options, called Black-Scholes, operates on the principle of mean reversion. Meaning that the model assumes that price anomalies will correct themselves rather than feeding on themselves. Of course, the opposite is often true for low-dollar stocks - which is GREAT for you!
In other words, the Black-Scholes model doesn't account for the fact that some of these small and mid-cap companies will turn out to be rocket ships, perhaps the next BIG Microsoft or BIG Wal-Mart - that is the BAM!
Secret #4:
Investor Bias Can Work in Your Favor
A $15 stock just looks less intimidating than a $100 stock. It means that stocks priced less than $30 look like good buys, better buys than the $100 stock - and are thus more prone to potential upward runs because of investor bias.
Maybe one of the best advantages of investing in options on stocks under $30 is the limited exposure. You've got a relatively small amount invested so you can tolerate the volatility in the market without getting shaken out of your position.
By buying low-dollar options, you can improve your risk/return ratio - particularly with low-priced stocks - invest less - gain more!
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