Stock Gambling, Taking a Risky Trade

Taking on a risky trade should not be a normal thing, but it is not a bad idea every now and then. In fact if the risk to reward is high enough, it might be worth taking on a small position.

Anytime you see a stock that has fallen so much, or an OTM option on a stock about to announce its earnings you know the odds are greatly against you being right, but at the same time the payout can be so enormous that dipping your toe in the water isn’t necessarily a bad thing, provided you do not jump in.

But anytime you feel the urge to roll the dice and go for a form of stock gambling ask yourself the following questions.

1. How Much am I risking

Anytime you try to buy a call on a on a down trending stock it is risky, and you should assume that all of the money you are putting into the trade you risk losing. In other words if your very speculative trade does not turn out like you want it too, you can lose 100% of your investment.

So keep this portion small. You might even want to risk less than you would normally risk on a trade. So if you would normally put 2% of your account on a normal trade, maybe only put 1% of it on a risky trade.

2. How Much Can I make If I am Right

There is no point risking 100% of your investment on a trade if you are only shooting for a 20% return. It is almost always better to take trades where your possible reward is far greater than your possible risk, so any gamble you take on should have a return of several hundreds of percentage or more if you are right.

3. How Often Do I gamble?

Obviously if your account is full of things like triple leveraged ETFS, Penny stocks, and OTM options you stand a good chance of taking your account to $0, and fast. Taking a small portion of your account and rolling the Dice may be acceptable a few times a year, but the majority of a trading account is always better in a more conservative investment or trade.

4. Why am I Gambling?

Are you gambling because your account is down 50% and you have to make it back? Or are you gambling because you really see a possible opportunity and do not mind risking a little money to see if you are right?

Getting into a risky trade might not be for everyone, but sometimes it can be worth it. For example my last roll of the dice was on Freddie Mac when it was trading at $.35, I figured they were controlled by the government so they were not going anywhere and that $.35 could be worth something one day.

I went into it knowing that if I lost 100% of the investment it would not affect my account very much, but if I was right it could be a large gain. Today FRE is trading at $.72 and I haven’t sold it yet because it still hasn’t made the move I was looking for and it is still only a small portion of my total account.

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