How to Double Your Money on a Bad Stock
While waiting my turn at the pickleball courts a few days ago, I overhead someone say: “The only way to double your money in the stock market in less than a year is to buy a penny stock and hope you get lucky.”
No disrespect intended, but that could not be further from the truth. The best way to lose a lot of money in the stock market in a short period of time is to buy a penny stock and wait for the inevitable collapse.
However, there is an element of truth in that otherwise inaccurate statement. If you want to double your money in the stock market in less than a year, you must be willing to take risks that most other investors shun.
Sometimes, that risk is in the form of a penny stock that might capture lightning in a bottle. I wouldn’t bet on it, but it does happen once in a while.
Other times, that risk is the result of a more established company that has fallen on hard times. If it can avoid bankruptcy, its share price can quickly escalate once it becomes apparent that it will survive.
I don’t recommend betting on that to happen, either. More often than not, companies in serious financial trouble tend to stay in trouble. Usually, they end up selling assets to remain solvent or being acquired by an opportunistic rival.
I consider both of those approaches to be more akin to gambling than investing. You are betting on an unlikely outcome over which you have no control.
Doubling Down on Kyndryl
There are better ways to rack up big gains in the stock market without taking huge risks. For example, a year ago I recommended an options trade known as a “long straddle” involving Kyndryl Holdings (NYSE: KD), a company spun off from International Business Machines (NYSE: IBM) two years ago.
At the time, I didn’t like anything about that deal and warned my readers to steer clear of it. I was proven correct. After going public at $50, KD quickly slid down the charts. By last August it was trading under $11. That’s when I made my move.
By then, the company was feeling pressure from Wall Street to prove that it could survive on its own. That’s when its CFO projected that Kyndryl would “achieve our medium-term goals, including sustained top-line growth, stronger margins and higher returns on invested capital.”
I didn’t know if he really meant it or was just saying that to keep the company’s anxious shareholders at bay. What I did know is that Wall Street would be watching closely to see if Kyndryl could deliver on those promises.”
That’s why I recommended a long straddle, which entails buying both a call and a put option with the same strike price and expiration date. The combined cost of purchasing both options was $3.50, which meant KD would have to either rise above or fall below both option’s $10 strike price by at least that amount for this trade to be profitable.
At first, it appeared the low bet was going to win. Two months later, KD was trading below $8. That’s where it bottomed out. Over the next four months it doubled in value, closing above $17 in February.
Trusting My Gut
At that point, the intrinsic value of our call option of over $7 was more than double the $3.50 purchase price of both options. And since that option still had another month to go until expiration, there was some additional time premium in it, too.
That’s as high as it went. A few months later, KD fell below $12. But that didn’t matter to me. By then, we were out of our options trade for a gain of better than 100%.
Of course, this trade was not without risk. Kyndryl could have stalled out shortly after those options were purchased. In that case, both options would have expired with no value.
To be clear, I wasn’t guessing that Kyndryl was about to become a more volatile stock. As I said then, “I have no idea which way it will go, but my gut tells me that it is going to move strongly one way or the other over the next three quarters. By then, it should become clear if Kyndryl can make it on its own or is destined to fail.”
My gut instinct was proven correct and readers that acted on that advice were handsomely rewarded. That opportunity has come and gone, but there will be many more to come. Wall Street is on edge and quick to overreact. The stock market spent the first seven months of this year on cruise control. But since the end of July, it has been spinning its wheels.
That’s bad news for gamblers trying to guess the identity of the next hot penny stock. But it’s good news for investors with proven techniques for identifying mispriced securities. I deploy such techniques, in my premium investment advisory Mayhem Trader.
As chief investment strategist of Mayhem Trader, I routinely flip market mayhem into fast payouts. Want to learn about my next money-making trades? Click here now.