With stock markets at historically high valuations as measured by almost any statistic and bond markets being manipulated by every central bank on the planet to insane levels - albeit some corporates have been selling off to some degree with the slight increase in rates - there is almost no place to park the cash. Real estate has been white hot, especially at the lower end where the market has been dramatically invigorated by the FHA and other “low down payment” alphabet soup Federal Loan programs (where have we seen this before?) yet the land market is still quite soft and quite a few deals still remain to those looking to get into this most illiquid end of the market. Even some of our most esoteric alternative investments, like the county tax certificate auctions, have been bid hard and the result is exceptionally low yields on quality assets. So I have been toying a little with some trading and investment strategies that may seem a little out of the ordinary. Here is a snap shot of one of those strategies:
Playing the spread on illiquid OTC stocks.
This is a simple strategy that takes two things: A massive amount of patience and quite a bit of available trading cash because you will have many open orders in your brokerage account.
Many OTC stocks will have a regular spread between the best bid and offer of nearly 50%. For instance, the stock ABCD has a current bid/ask of .08/.13 and although the daily volume is very low, it has traded some shares almost every day. The strategy is simple - just put in an order to buy at or near the bid at .08 and wait. I don’t get greedy and build too large of a position because if someone drops some serious shares it could take forever to get out of the trade. So I think small like 10K or maybe 20K shares or less (this is only $800 to $1600 if filled completely). It may take a week or even a month to completely fill the order (there will be some days when no shares trade or bids are hit and maybe other days when only a few shares are filled). Once the order is at least half filled I drop those shares near the offer with a good til cancel order. Brokerage commissions could kill you if you just place day orders or if your broker charges for partial fills. I have been only filled 2 shares on a 5 cent stock and the commission is still $9.99 (those types of commissions will add up and hurt the overall return - but All or None orders will rarely get filled so there is the commission risk). So here comes the patience part. It may take days or weeks to accumulate the position and days or weeks to exit the position. But the returns are amazing if you spread the strategy around to dozens (or even hundreds) of symbols. That is why you need some serious buying power, as you will have many open orders. On the above trade let’s say it takes two weeks to fill the 20,000 shares at .081 cents (or about $1620 plus commissions). Then another two weeks to exit the shares at .129 offer (or about $2,580 minus commissions). Your possible gain is $960 or a gain of 59%. The biggest risk in trading OTC stocks is the inevitable price decline. I would say that 90% of OTC stocks will lose at least half of their value in a year or less. This is why I have to keep the trades small and exit as soon as possible. Also spreads will tighten at times and the profit margins slim drastically. Here you just play the cards that are dealt. Happy trading.
Playing the spread on illiquid OTC stocks.
This is a simple strategy that takes two things: A massive amount of patience and quite a bit of available trading cash because you will have many open orders in your brokerage account.
Many OTC stocks will have a regular spread between the best bid and offer of nearly 50%. For instance, the stock ABCD has a current bid/ask of .08/.13 and although the daily volume is very low, it has traded some shares almost every day. The strategy is simple - just put in an order to buy at or near the bid at .08 and wait. I don’t get greedy and build too large of a position because if someone drops some serious shares it could take forever to get out of the trade. So I think small like 10K or maybe 20K shares or less (this is only $800 to $1600 if filled completely). It may take a week or even a month to completely fill the order (there will be some days when no shares trade or bids are hit and maybe other days when only a few shares are filled). Once the order is at least half filled I drop those shares near the offer with a good til cancel order. Brokerage commissions could kill you if you just place day orders or if your broker charges for partial fills. I have been only filled 2 shares on a 5 cent stock and the commission is still $9.99 (those types of commissions will add up and hurt the overall return - but All or None orders will rarely get filled so there is the commission risk). So here comes the patience part. It may take days or weeks to accumulate the position and days or weeks to exit the position. But the returns are amazing if you spread the strategy around to dozens (or even hundreds) of symbols. That is why you need some serious buying power, as you will have many open orders. On the above trade let’s say it takes two weeks to fill the 20,000 shares at .081 cents (or about $1620 plus commissions). Then another two weeks to exit the shares at .129 offer (or about $2,580 minus commissions). Your possible gain is $960 or a gain of 59%. The biggest risk in trading OTC stocks is the inevitable price decline. I would say that 90% of OTC stocks will lose at least half of their value in a year or less. This is why I have to keep the trades small and exit as soon as possible. Also spreads will tighten at times and the profit margins slim drastically. Here you just play the cards that are dealt. Happy trading.
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