An appealing aspect of options trading is market volatility because it can result in larger and faster profits for traders or investors, especially those who are into price speculation or are day traders. Volatility is the degree of variation in the price of an asset, and it could be used to secure a hefty profit or lead to big losses if it’s not properly managed.
Our guide will talk about “low-float” stocks which are perfect fodder for volatility plays, especially when paired with long strangles (buying OTM call and put options). These stocks have a small number of shares available to the trading public and they’re subject to large price swings when bought or sold. They’re the perfect example of an asset that can generate profit based on volatility in the markets.
Is this a savvy play or a reckless gamble? Keep reading to find out!
What Are Low-Float Stocks?
When you hear other traders talking about “low-float stocks,” they’re referring to stocks where there’s a relatively small number of shares that are available to the public for trading. Low-float stocks have a significant number of stocks that are restricted from trading with many of the company’s outstanding shares being held by insiders.
It’s key to note that low-float stocks are usually considered more volatile and are much more difficult to acquire than regular stocks. There are a number of factors that can affect the “float” or the number of shares freely available for trading in the market: insider holdings, stock-based compensation, stock buybacks, and reverse splits.
Key Traits of Low-Float Stocks
Low Liquidity
Low-floats are the best stocks to deal with if you want to buy and sell shares quickly and easily. Due to the limited supply of shares, low-floats can be difficult to buy or sell, and doing so can drastically affect the stock price.
Higher Spreads
Low floats have wider spreads between the bid and ask prices which make them harder to buy or sell at the desired price. The wider spreads are due to the lower liquidity that comes from a limited supply of shares.
High Volatility
Because there are fewer shares available for traders and investors to deal with, low-floats are susceptible to high volatility. Limited availability makes the prices for these stocks swing wildly, even if a trade is buying or selling a small amount of them. Traders can expect the pricing to be unpredictable.
Rapid Price Swings
As mentioned above, low-float stocks can have rapid price swings as traders’ actions can cause immense buying or selling pressure. Because there are a ton of short-term price movements, low-floats are a great option for day traders and price speculators who need high-volatility environments that can result in quick profits.
Susceptibility to Manipulation
With fewer shares available, low-floats can be more easily manipulated than other stocks. Manipulators can potentially accumulate a larger float percentage which gives them a greater degree of control over the stock’s price. They can then manipulate the stock price for their own gain, both through inflation or deflation of the price.
Real Examples of Low-Float Stocks
The general consensus is that a stock is considered a low float when it has less than 20 million available shares for investors to trade. Some people point to a range of 10-20 million (or lower) being the general range where you’re going to find the most low-floats. For over-the-counter exchanges, a low float is generally seen as one million or fewer shares available to the trading public.
Real-World Low-Float Stocks
- Regional Health Properties (RHE)—1.62 million shares available
- AMCON Distributing Company (DIT)—152,000 shares available
- Cyclerion Therapeutics Inc. (CYCN)—2.07 million shares available
- Boxlight Corporation (BOXL)—Less than 10 million shares available
If you’re interested in seeking out other low-float stocks, it’s important to keep in mind that the exact float might not be readily available to the public. Traders may have to look into company filings or talk with financial data providers to get their hands on this information.
Ideal for Day Traders and Speculators
There’s a high element of risk with low-float stocks, which can make them incredibly appealing to price speculators and day traders. The main appeal of these stocks is that they have high volatility, offering the potential for greater gains, as well as opportunities for catalyst-driven moves.
Limited Number of Shares | When demand for shares of these stocks increases, the limited supply of shares can lead to dramatic price increases. On the flip side, if there’s reduced demand for negative news regarding the company, the stock price can decline sharply in response. |
Higher Volatility | These stocks are noted for a higher rate of volatility which is ideal for day traders or price speculators to make profits by taking advantage of short-term price fluctuations. |
Appreciation with Rapid Price Changes | Day traders and price speculators will enjoy the fact that low-float stocks experience repair price appreciation in a short window of time due to high relative volume and some kind of catalyst. |
Day Trading Opportunities Via Catalysts | News events can serve as catalysts to a big price shift which is a profitable scenario for day traders or price speculators. Events can include earnings reports, new product announcements, or approvals/regulations. Because of the limited supply of shares, traders can take advantage of the large price shifts that are more pronounced in low-float stocks. |
Quick Recap—What Is a Strangle in Options Trading?
Long strangles in online options trading refer to a strategy where traders are simultaneously buying a call and a put option on the same underlying stock or asset. The call and put option comes with a different strike price but the same expiration date. The goal with the long strangle is to profit from a large price swing in either direction, making it an excellent trading strategy to use when dealing with low-float stocks.
Why Traders Use the Long Strangle
Technically, the long strangle is a “neutral strategy” because the trader isn’t focusing on the stock prices going up or down. The basis of the long strangle is that the trader is unsure of which direction the market will be going, so they’re making a bet on volatility having a profound impact on the stock’s price. Part of the appeal of the long strangle is that the trader doesn’t have to get the direction of the price movement correct to profit from the trade.
Comparison With Other Volatility Plays
Let’s take a look at how the long strangle compares to other volatility plays. Keep in mind that the first three listed below profit when volatility is on the rise, while the last three profit when volatility is decreasing.
Long Straddle
Buying a call and put an option on the same underlying asset with the same strike price and expiration date. Following volatility, the profit potential is unlimited in either direction, and losses are limited to the premium.
Long Call
Buying a call option where you profit from the underlying asset’s prices increasing significantly above the strike price.
Long Put
Buying a put option where you profit from the underlying asset’s prices decreasing significantly below the strike price.
Short Straddle
Selling a call and put option with the same strike price and expiration dates which profits from decreasing volatility and stable prices.
Short Strangle
Selling a call and put option with different strike price, but the same expiration dates and it profits from decreasing volatility and stable prices.
Iron Condor
Selling out-of-the-money call and put options and buying further out-of-the-money call and put options. Iron condors profit when the underlying asset stays within a specific range and volatility begins declining.
Why Traders Combine Strangles with Low-Float Stocks
Volatility is the core appeal—ideal for a strangle’s profit profile. When combining short strangles with low-float stocks, traders have the potential to rake in high returns in certain scenarios. A key consideration for traders and investors who are pairing this strategy with these types of stocks is that cheap options can offer massive potential ROI. However, the success of this pairing largely hinges on market events like earnings reports, PR, or low-volume scenarios that can create huge swings.
Benefits of the Strangle/Low Float Combo
- Quick Profits in Range-Bound Contexts—So long as a low-float stock remains within a certain range (between the strike prices of the sold call and put options) by the expiration date. If both of the options expired as worthless, the seller could still keep the premium they collected upfront from the sale as a profit.
- Take Advantage of Implied Volatility—Low-float stocks have higher implied volatility which can lead to inflated option premiums. Traders can take advantage of these scenarios by using strangles and other volatility plays.
- Higher Options Premiums—Due to the increased volatility you see with low-float stocks, there are higher premiums on both call and put options in a strangle strategy, which can lead to boosted income for the seller.
Risks of the Strangle/Low Float Combo
- Low Liquidity—Low-float stocks are less liquid because there are fewer shares available for trading. Because they are harder to buy and sell quickly, low-float stocks can make it hard to effectively manage positions when using a strangle strategy.
- Market Manipulation Risks—Another significant risk is that low-floats are more susceptible to market manipulation tactics like pump-and-dumb schemes which could have a bad effect on a strategy that partners the strangle move with low-floats.
- Short Squeeze—If the stock price goes up sharply, short sellers are put into a position where they might have to buy back the shares to cover their positions and this can lead to big losses for strangle sellers.
- Potential for Large Losses—Even though traders can use low-float stocks to potentially bring in large profits via a strangle strategy, there’s the chance that they could incur big losses if the stock prices move in the wrong direction, devaluing the stock’s price.
The Genius Case—When It Works
Let’s take some time to show you a good example of a long strangle on a low-float stock and how it could possibly benefit an online options trader. We’ll work through it step-by-step to give you a clear idea of how it all works.
- The scenario is that there’s a low-float stock trading for $100 per share.
- The trader looking to use a long strangle approach for this stock would buy a call option with a strike price of $105 and a put option with a strike price of $95.
- Both of these options would come with an expiration date that would be set for 30 days out. If we are assuming a $5 cost for the call and a $5 cost for the put, you’d be looking at a total premium paid of $100 ($10 per share for a contract of 100 shares).
- Let’s take a look at the breakeven points. For the call option, it would be $110 ($105 strike price + $5 premium) and the put option would have a breakeven point of $90 ($95 strike price – $5 premium).
- If the stock price goes above $110, the trader would profit from the call option. However, the market could move the other way, in which case the trader can profit on the put option if the stock price falls below $90. The worst case scenario is if the prices stay relatively stable, bound within the range between the breakevens.
- The trade wins if the stock prices go either above $110 or below $90. If the price winds up between $95 and $105, the trader experiences a loss but it’s limited to the premium paid: $100 ($10 per share for a contract of 100 shares).
The Impact of Delta and Gamma
It’s worth noting that delta and gamma work in your favor on big moves as they both amplify option profits when the underlying asset moves in the direction of the option’s strike price. In the case of the long strangle, this would work both ways as volatility can drive the price in either direction to a profitable end.
- Delta—This Greek ensures that the option’s price moves with the underlying asset.
- Gamma—This Greek amplifies the movements by accelerating the delta changes, which makes the price of the option more responsive to price swings in the underlying asset.
- Defined Risk
A big appeal of the long strangle for a lot of traders or investors is that the maximum loss is known upfront and it’s limited to the total premium they paid to enter the call and put options positions. Not only is the total potential loss relatively low for the profit that could be made, but it’s also a plus that the total loss can be known upfront before the trader even begins executing the long strangle on the low-float stocks in play.
The Risky Reality—When It Blows Up
When it comes to using the strangle strategy with low-float stocks, there are some big risks that traders are taking with this approach and we’ve outlined them here for anyone interested. It’s a strategy that doesn’t work for everyone, so we’d encourage you to brush up on the risks before making a final decision.
IV Crush | Implied volatility usually spikes before a market event and then drops significantly afterward, a phenomenon known as “IV crushes.” This risk usually manifests post-earnings or after news fades. When it comes to long strangles, IV crushes can erode the value of the options which could lead to losses, even if the stock price moves. |
Wide Spreads | Because low-float stocks have fewer available shares, there’s a wider spread between the bid and ask prices which makes it harder to buy or sell at the desired price. They’re caused by low liquidity and buying or selling that’s done with these stocks leads to drastic changes in the stock’s price. |
Poor Fills | Another big risk with low-float stocks is that your order can be executed at a price that’s much worse than you initially expected. A few other scenarios associated with poor fills are the broker taking an unreasonable amount of time to fill the orders or not having your order filled at all. |
Slippage | This risk refers to the difference between the expected price of your order and the price you actually get when the order is filled. This problem can arise quite frequently with low-float stocks. |
Stocks Stay Range-Bound | The strangle is banking on volatility to be profitable which means that both legs decay rapidly if the stock price stays range-bound. |
Theta Decay | This works against the long strangle because both options are losing value as time passes. This means that the market needs to move relatively quickly in either direction for the long strangle to be profitable, otherwise the strategy would be all for naught. |
Example of a Hypothetical Trade Not Working Out
Let’s say there’s a low-float stock that is trading at $100 per share and it’s certain that a large price swing is to happen quite soon, but the trader isn’t certain on which direction the market will be moving.
- The Initial Setup: The trader would buy a call option with a strike price of $105 for $5 per share and also buy a put option with a strike price of $95 for $5 per share.
- The Premium: The total cost for entering these trades would be $100 ($10 per share for a contract of 100 shares).
Now let’s run through the possible scenarios where the long strangle might not work out for the trader:
- The Price Movement Stays Range Bound—This occurs when neither the call option nor the put option is in-the-money upon the expiration date. In this case, the stock might only move from $100 to only $97 and the option would expire as worthless leading the trader to incur a loss of $10 premium per share.
- IV Crush—Implied volatility could be expected around a particular market event, but it could drop off completely following the event, even if the stock price moves. The sudden drop in volatility can greatly reduce the value of the option, even if the call or the put option happens to be in the money.
- Risks With Low-Float—The price swings that come with low-float stocks might not last long enough to generate a profit from a long strangle approach.
- Time Decay Considerations—Another possibility is that the stock price remains relatively stable over time, and time decay erodes the value of both options contracts as they get closer to their expiration date. Due to this deterioration, the profit potential might not be as great as it could be.
Tips for Managing Risk with This Strategy
What are some of the most effective strategies for managing risk in low-float stock trades? You’ll find that many of the strategies and techniques that are used for trading regular stocks also apply here, so we’ll be going over some familiar principles. Check out these best tips for minimizing potential losses over time and for incrementally maximizing potential profits.
Use Small Position Sizes
You cannot incur a huge loss if you only stake a small amount of capital in your position. That’s the essence of small position size as a strategy. By only using a small portion of your available capital, you can minimize losses over time.
Wide Spreads
Because low-float stocks have fewer available shares, there’s a wider spread between the bid and ask prices which makes it harder to buy or sell at the desired price. They’re caused by low liquidity and buying or selling that’s done with these stocks leads to drastic changes in the stock’s price.
Avoid Front-Running Events
”Front running” occurs when a broker or institutional investor trades an asset for their own benefits based on advanced, public knowledge of a pending large order from a client. Traders should avoid these events as most of the time they have uncertain outcomes and can lead to big losses. From a risk-management perspective, it’s best to steer clear of front-running.
Use Defined-Risk Spreads
Instead of naked options, consider using a defined risk spread, which is a strategy that limits the maximum potential loss and reward of the trade. Traders can do this by pairing numerous options contracts on the same underlying asset (same expiration date and different strike price).
Avoid Illiquid Options Chains
Before trading low-float stocks, it’s best to check out the data on open interest and spreads to find out which could be the most profitable and best to deal with.
Tools to Help Evaluate the Setup
To effectively trade low-float stocks using the long strangles as your primary approach, you need to be using the right trading tools to make this approach work. If you’re interested in trading float stocks, we recommend you use all of the tools below for the best all-around experience.
Screeners | To find low-float stocks, we’d recommend using options screeners such as Finviz or Market Chameleon to pinpoint stocks that are low-float and those that will fit well into your current trading plan, risk tolerance, and trading goals. |
IV Rank/IV Percentile Tools | Because low-float stocks have fewer available shares, there’s a wider spread between the bid and ask prices which makes it harder to buy or sell at the desired price. They’re caused by low liquidity and buying or selling that’s done with these stocks leads to drastic changes in the stock’s price. |
Options Profit/Loss Calculators | Traders can forecast the profit and loss potential of their strangle trades. They can look at different scenarios by using various criteria like volatility levels, the price of the underlying, strike price, or expiration date. |
Risk/Reward Visualizers | This takes everything to the next level. These visualizers can help traders understand how profits and losses are ultimately tied to your initial risk. |
Final Verdict—Risky or Genius?
Should you strangle a low-float stock? It’s a decent question to ask because there are some significant pros and cons to be found with using this strategy with these kinds of stocks. Knowing the risks ahead of time makes it easier for traders to decide if it’s an approach that’s worth the time and money. It can be a profitable strategy for a lot of options traders, but it requires a good sense of timing market events and trading in high-volatility environments.
Pros
- Higher premiums for sold options, which provide more income to the seller.
- Use strangles to profit from market volatility (you don’t have to correctly predict the direction the market is heading).
Cons
- Low-float stocks are difficult to buy and sell quickly without drastically affecting the price (low liquidity).
- Potential for market manipulation like pump-and-dump schemes.
- Wider bid-ask spreads lead to the erosion of profits when entering or exiting positions.
- Amplified volatility can lead either option in the strangle to become a liability if they move in-the-money.
At the end of the day, using strangles with low-float stocks is a smart strategy for experienced traders, but it can be extremely dangerous for newbies. There’s a reason that it’s a popular move with active traders, especially day traders. Anyone using the long strangle on a low-float needs to have a sound trading plan where they’ve worked out all the profit/loss and risk/reward scenarios ahead of time.
The Bottom Line: Tame the Beast, Don’t Get Burned
Strangles and low floats can be risky, especially for new traders with little experience who will likely blow up their accounts pursuing a move of this magnitude. However, it can be a brilliant move for advanced traders who know how to structure a strong long strangle and have the right timing to lead a low-float to a profitable end!
Key Takeaways
- Strangles can work brilliantly with big volatility.
- Low-float stocks offer explosive potential—but extreme risk.
- Use only risk capital and define your maximum loss.
- Great strategy for advanced traders who love volatility.
- Always trade with a plan—don’t chase hype.
Looking to test this strategy with real data?
👉 Check out our list of the best options trading platforms to get started with paper trading or real money.
