We \[*mostly*\] all know the general dangers of penny stocks. *Large short sellers, dilution, delisting risk, no news moves/round trips, just generally buying not great companies.*
However, I believe one of the most slept on risks are ***spreads*** (difference between the bid/ask)…
At 3:50pm I sat down to prep for afterhours trading, as I normally do. As usual, quite a few of the morning runners got rejuvenated from postmarket traders making a secondary move.
Then $WVVIP popped up on my momentum scanners again. It didn’t have much volume but it was definitely moving and it looked interesting UNTIL I looked at the level 2 data.
The spreads were roughly $0.30. That’s not the absolute worst by itself, but as I continued watching the spread started jumping around, and for a brief few seconds the spreads hit ***$2 per share*** and continued bouncing around from $0.30-$1+ spreads as it fell.
$WVVIP moved from \~$3.05 all the way to \~$6.88, an absolutely fantastic move in about 10 minutes from the bottom to the top. But as the momentum started to die out the floor absolutely dropped out from under it with the ask still sitting at $7 and the bid dropping all the way to $5… Yesterday at close this stock was <$3, by mid premarket this morning it was at $28… Now it’s back under $5 and will probably continue to fall back to its levels prior to this morning.
If you hit the ask with only 100 shares and realized you were wrong trying to get out on the bid you would have *nearly $200 of slippage* from the spread alone… You may have gotten some relief with getting met somewhere in the middle with orders actively going in and out, but that is risk that is almost impossible to manage. Waiting for volume to confirm a move is drawing attention is very important for this exact reason.
It’s still pretty active as of this post but volume is absolutely not there. Don’t get fooled seeing big moves on light volume… If you get in thinking it’s an A+ setup you may have the floor disappear right out from under your feet.
Managing risk is what sets a trader apart from a gambler.
Curious what other penny stock traders look for to manage risk and avoid potential bad trades?