Options on penny stocks are possible, but standard listed options are usually unavailable for OTC penny stocks. Some stocks priced below $5 and listed on Nasdaq or the NYSE have listed calls and puts if they meet exchange requirements and an options exchange lists a class for them. The rules cited here were checked on.
Penny Stock Options at a Glance
| Stock type | Can you trade standard listed options? |
|---|---|
| OTC penny stock with no option chain | Usually no |
| Nasdaq or NYSE stock priced below $5 | Sometimes |
| Exchange-listed stock with an existing option chain | Yes, subject to broker approval |
| Stock below $3 with no existing option class | Generally not eligible for a new class under the standard price test |
| Any stock through a normal brokerage account | Only if listed options are available for that ticker |
A standard equity option usually represents 100 shares of the underlying stock. A premium quoted at $0.05 normally costs $5 per contract before fees because the premium is multiplied by 100 shares.
Why Most OTC Penny Stocks Do Not Have Options
Most OTC penny stocks do not qualify for standard exchange-listed options. Listed options exchanges generally require the underlying security to be a registered NMS stock that is widely held and actively traded. They also consider trading volume, shares outstanding and market price.
The SEC says companies may trade over the counter when they cannot or do not want to meet national securities exchange requirements, including minimum share-price and public-float standards. OTC securities may also have less public information and lower liquidity.
A ticker on an OTC platform does not automatically have:
- Listed calls
- Listed puts
- Reliable option quotes
- Enough liquidity for an options market
- Support from a regular retail brokerage
If your broker shows no option chain for an OTC ticker, you generally cannot trade standard listed options on that stock through the account.
Can a Stock Under $5 Still Have Options?
Yes. A stock priced below $5 can have options if it is exchange-listed and meets the applicable listing standards.
People often use "penny stock" to describe any stock trading below $5. The SEC's regulatory definition is narrower and excludes certain NMS stocks listed on a national securities exchange that meet minimum quantitative standards.
For example, a $4 Nasdaq-listed company may have listed options if it meets the relevant requirements and has an active option class. A $0.20 OTC stock generally will not have standard listed options because it lacks the exchange listing, market structure or trading activity required for an options market.
What Price Must a Stock Reach to Get Options?
Under the Nasdaq ISE's standard underlying-security rules, a covered security generally must have a market price of at least $3 for the previous three consecutive business days before a new option class can be listed.
A security that does not qualify as a covered security generally faces a $7.50 price test for most of the preceding three-month period.
This creates three practical points:
- A stock above $3 may qualify for a new option class if it meets the other standards.
- A stock below $3 generally will not qualify for a new option class under the standard price test.
- An existing option class may continue trading under separate maintenance rules or exchange procedures if the stock later falls below the initial listing threshold.
Price is only one factor. Trading volume, public float, the number of shareholders, registration status and whether another options exchange already lists the class can also matter.
How to Check Whether a Penny Stock Has Options
Use this process before placing a trade:
- Confirm where the stock trades. Check whether the ticker is listed on Nasdaq or the NYSE, or quoted over the counter.
- Search for the ticker in your broker's option chain. If there are no expiration dates, strike prices, bids and offers, there is no standard listed option market available through that platform.
- Check liquidity. Review the bid-ask spread, trading volume and open interest. An option can be listed and still be difficult to trade if few contracts are active.
- Confirm the contract multiplier. Standard equity options usually represent 100 shares, although corporate actions can create adjusted contracts.
- Check your options approval level. FINRA states that brokerage customers need specific approval before trading options.
The Main Risks of Trading Options on Low-Priced Stocks
Options on low-priced stocks can be difficult to trade because the underlying stock may be volatile or illiquid. The option may also have a wide bid-ask spread, which raises the cost of entering or exiting a position.
Buying Calls or Puts
When you buy an option, the premium paid is generally the maximum amount at risk if the option expires worthless. The stock must move far enough, and soon enough, to cover both the strike price and the premium paid.
Selling Calls or Puts
Selling options creates additional obligations:
- An uncovered short call can create theoretically unlimited losses.
- A short put can require you to buy 100 shares per contract if assigned.
- Short options can require margin and additional funds.
- Equity options can be assigned before expiration because they are generally American-style options.
Assignment can create a large position compared with the premium received. A low share price does not make selling options safe.
What to Trade if the Penny Stock Has No Options
If a penny stock has no listed option chain, the practical alternatives are:
- Trade the shares directly, subject to the stock's liquidity and broker restrictions.
- Use options on a more liquid, exchange-listed company in the same industry.
- Use an exchange-traded fund with exposure to the relevant sector.
- Avoid products advertised as "penny stock options" unless you understand whether they are listed options, contracts for difference, warrants or another derivative.
An option contract priced at a few cents is not automatically an option on a penny stock. The underlying stock, contract terms and trading venue determine what you are buying.
Bottom Line
The share price alone does not tell you whether options are available. Check the listing venue, search for an option chain through your broker, and then review the spread, volume, open interest and contract terms.
For an OTC penny stock with no option chain, standard listed calls and puts are not available through a normal retail brokerage account.