Greetings, VWAP heads!

If you’ve ever watched me, you’ll know that I’m all about trading around the VWAP to determine my trades.

However, I know many of you – like Freddy and Lisa here – have been wondering how I might play a POSITIVE VWAP setup using options…

Always excellent questions in the chat

Well, guess what?

Today’s your lucky day, BLANCHE!

The Warlock is here to teach you the ABCs of call buying, and how I tend to trade options around earnings.

What Are Call Options?

For those of you new to the options game, let me break it down in the simplest terms possible.

There are two types of options: Calls and puts.

There are about a billion different strategies you can do with these options, but for simplicity’s sake, we’re going to talk about straight-up “vanilla” buying today.

In a nutshell, a trader will buy a call if they think the underlying stock is going higher, and will buy a put if they think the underlying stock is going lower.

When selecting which option to buy, the trader must consider a couple things, both of which will be reflected in the option’s price (which also represents the maximum risk):

1) The strike price: This is the “line in the sand,” so to speak. A call buyer expects the shares to move above the strike price, while a put buyer expects the shares to move below the strike price.

A call is considered “in the money” (ITM) if the underlying stock price is above the strike price, while a put is ITM if the stock price is below the option’s strike.

ITM options will be more expensive than options that are at (ATM) or out of the money (OTM), because they’re the only options with intrinsic value.

So, if hypothetical stock Warlock World Domination (GLIK) was trading at $50, the $48-strike call would be $2 in the money – and that intrinsic value would be reflected in the cost of the contract.

On the other hand, the ATM $50-strike call would cost less than the ITM option, and the OTM $52-strike call would be even cheaper.

2) The expiration date: Options expire at the close on Fridays. Many stocks have weekly options expiring EVERY Friday, while other less liquid stocks have only standard monthly options (expiring the third Friday of the month) and LEAPS (Long-term Equity AnticiPation Securities) expiring each January a few years out.

Time is money, as they say, and options are no exception.

A $50-strike call that expires in two days will cost much less than a $50-strike call expiring in two months.

That’s because you’re buying more time for the underlying shares to make a move in the right direction.

In the best-case scenario for a call buyer, the underlying stock will skyrocket above the strike price by expiration, thus increasing the intrinsic value of the call, and the trader can sell to close that option for a profit.

In the worst-case scenario for a call buyer, the underlying stock stays or moves below the strike price, and the trader loses the entire premium paid for the contract, with the option expiring worthless.

How The Warlock Plays Options Around Earnings

Earnings season gives us the volume we need to trade around the VWAP. It’s our bread and butter for new trade setups.

Specifically, I’m ALWAYS hunting those earnings reversals, so if I see a setup emerging, consider me interested.

However, on some of the more expensive names, I prefer using options over buying or shorting the shares outright, because these contracts allow me to control hundreds of the underlying shares at a fraction of the cost. That’s called LEVERAGE.

So… how might I, Kenny Glick, the greatest trader EVER, use call options around earnings?

Well, there are a few things to remember:

  1. I don’t usually buy options before an earnings report.

This is because implied volatility (IV) rises ahead of earnings, due to expectations for a big reaction one way or another.

In the simplest terms, buying options before an earnings report is like buying a car the day before it goes on sale. It’s ALREADY going to depreciate when you drive it off the lot, and now you wanna toss even MORE money into the wind?

Instead, I wait until the company’s earnings are released before I begin speculating.

This not only takes the DIRECTIONAL guesswork out of the equation – it also prevents me from overpaying for options contracts (sometimes by 20% to 30%), since IV deflates rapidly after earnings are released.

  1. I don’t overpay for time I don’t need.

I’m a day trader – I don’t typically buy and hold investments overnight.

So whether I’m speculating with shares or options, I’m looking to get in and out of my trades with a quickness, entering and exiting the same day.

Therefore, I’m usually looking at the options that expire soonest – often weekly options expiring the upcoming Friday.

  1. I don’t buy deep OTM contracts.

I usually target ATM options, buying around the underlying stock price at the time.

Yes, these are more expensive than OTM options, but they’re more likely to move ITM in time for me to profit on the right side of the VWAP day trade.

Profiting from an OTM option purchase would require a bigger move by the underlying shares in a short time frame – and yes, sometimes that happens and the buyer gets lucky, but most OTM options end up expiring worthless.

So circling back to the hypothetical GLIK example, if the company reported earnings Thursday night and the VWAP is giving me bullish signals on Friday morning, I might buy an at-the-money call option expiring the same day.

If GLIK shares go notably higher that session, my calls should increase in intrinsic value – and as long as that increase is enough to offset the rapid time decay heading into expiration, I can sell to close my contracts for a tidy profit.

That’s all for today, VWAPers, but I’ll be on weekday mornings – starting at 8:30 a.m. ET on Money Morning Live, so make sure you’re there!

It’s gonna be a fun week for VWAPians…

Kenny “The Warlock” Glick


4 responses to “Playing Calls Around the Biggest Earnings of the Season”

  1. GOOD presentation! Clear English, actual specific answers, and barely long or repetitous enough to raise a yawn.
    Congratulations for leaving the Snake Oil club behind.

  2. BTO Qs today 8/2/21 2 @ $1.23 & STC @ $2.35. Bought below the VWAP, rode it up, sold one and sold the other later. Exciting and with little stress! See you in the morning

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