Hey, VWAP fam!
Which means you probably missed me stalking SPRT at the opening bell during my usual 9:30 a.m. ET LIVE trading hour in this room…
Which means you probably weren’t celebrating an absolute bombshell of a day for SPRT by Thursday’s closing bell.
SPRT closed 41% higher Thursday
That’s a shame.
But don’t worry, today I’m here to explain why I was expecting new highs for SPRT – and why I did something I rarely ever do…
I talked up a (gag) bull call spread.
Keep reading for my rationale behind that trade (and the trade I WISH I’d made instead,) then join me in the room!
I See Skies of Blue…
During my usual pre-market cameo on Money Morning LIVE yesterday, SPRT popped up on my radar due to early momentum and volume.
One of the reasons I was watching SPRT was because the stock wasn’t too far from a split-adjusted high, and moving above $16.50 would be territory not explored in more than 10 years, as you can see on the weekly chart below.
Weekly chart of SPRT over 20 years – courtesy of ThinkorSwim (ToS)
For those of you who don’t know, once a stock takes out a former high – especially an all-time high – a lot of times it’s blue skies ahead… meaning if the stock can get past that hurdle, it usually breaks out even higher.
Plus, $16.50 is a half number, and once a stock takes out a half number, it more often than not climbs to the next whole number.
Of course, as alluded to earlier, SPRT did ultimately break out to new highs, proving that EVERYTHING I SAY IS IMPORTANT…
Which brings me to the trade I rarely put on but did – and why I regret half of it.
Behind the Bull Call Spread
At the time of Thursday’s LIVE trading hour, SPRT hadn’t yet made a definitive breakout above $16.50 (red line on the chart below), but it had been knocking on the door.
SPRT 1-minute chart with VWAP on Aug. 26
And because momentum had been in the bulls’ favor for a while on SPRT – the stock just notched a sixth straight daily gain – short-term call options were outrageously expensive.
See, instead of buying shares outright, bullish traders can purchase call options on a stock – you can read all about buying calls here.
But the more expensive the options, the more the stock has to move on the charts in order for the buyer to breakeven, and the more money is at risk if the option expires worthless.
For instance, if Big Al Glick (that’s my dad) bought a $100-strike call for $5, the stock would need to top $105 (strike plus premium) in order to cover that cost. If that same call cost $10, though, the stock would need to top $110.
So if you’re an option buyer, prices definitely factor into your trading plan – just like anything, you don’t want to overpay, which is part of the reason I never buy options BEFORE an earnings report, when implied volatility (IV) is outrageously high.
One way to combat expensive call options, though, is by initiating a (gag) bull call spread.
A bull call spread is two steps:
- Buying to open a call option
- Simultaneously selling to open a higher-strike call option with the same expiration date
You can see here that yesterday I suggested buying to open $16-strike SPRT calls for $3.60, and simultaneously selling to open $30-strike calls for $1.80 – with both options expiring in September.
The purpose of adding that sold call is to reduce the cost of entry on the bought call, which in turn limits the risk on the entire trade.
The risk on that SPRT spread would’ve been $1.80 ($3.60 paid for the bought call minus $1.80 received for the sold call) at those prices – half of what it would’ve cost to buy those $16-strike calls outright.
The SPRT Trade I Wish I Made Instead
The downside to the bull call spread – as I witnessed with SPRT – is the addition of the sold call also limits the potential reward on the trade.
That sold call strike acts as a profit ceiling, so to speak; no matter how high the shares move above it, reward on the trade is capped.
That’s compared to the profit potential of a straight call purchase, which is theoretically unlimited.
And considering SPRT absolutely skyrocketed in after-hours trading last night, I regretted capping my profit potential with the sold $30-strike calls, as I told my buddy Mark Sebastian.
That said, I once again want it on the record that I usually hate call spreads – the only time I’ll even CONSIDER them is when:
- The call options I want to buy are extremely expensive, and
- I’ve already made some cash from day-trading VWAP, so I’m essentially playing with “house money“
But any other day, I’m looking to stick with what works for me – stalking earnings reversals, reacting to VWAP breaks, buying and shorting shares outright, and occasionally speculating with at-the-money options in the series expiring soonest.
We’ll talk more about the SPRT trade during my LIVE session today, so make sure you’re in the room at 9:30 a.m. ET!
Otherwise, have a great weekend, VWAPians!
Kenny “The Warlock” Glick
August 27 2021