Hey there, VWAPians!

Last week, I hosted a special TRADE THE CLOSE session with my good buddy Mark Sebastian, the King of Asymmetric Option Returns and Big-Money Flow.

We attempted to identify some levels of interest on Alibaba (BABA), in particular, on Thursday night, as the stock moved on Chinese regulatory news.

I said after-hours Thursday that I might dip my toes into long BABA put options, which brought up some excellent viewer questions on how I might play stocks I expect to decline using options.

It also brought up several other important lessons for would-be and current VWAP traders, including:

  1. Why patience usually pays
  2. When the advantage is in your favor (and when it isn’t)
  3. The safest way to play the only indicator you’ll ever need

So today, we’ll review these key options lessons and VWAP takeaways, and I’ll go over some of the stocks that could emerge on my daily Warlock Watchlist this week (but you gotta be in the room LIVE at 9:30 a.m. ET to see if they do!).

My 2 Rules for Playing Options

In case you’re new to This Is VWAP, I’m a day trader who is usually buying or shorting shares outright for very brief periods of time (opening and closing positions the same day).

But on occasion, it makes sense for me to use options to speculate on the stock’s direction.

If I feel the stock is headed higher in short order, I might buy call options.

If I feel the stock is headed lower – like BABA last week – I might buy put options.

Using options instead of the shares themselves can give me more bang for my buck, especially on the more expensive stocks, and my risk is limited to the initial premium paid for the option contracts.

That’s especially helpful on the bearish side, considering short selling is extremely risky and shouldn’t be taken lightly.

However, when I do utilize options, I tend to follow a couple “rules”:

  1. I buy the closest expiration series – usually with just a day or less until the buzzer.

Most of the stocks I trade have weekly options that expire each Friday. (The Invesco QQQ Trust – better known as “the Qs” – actually has options that expire every Monday, Wednesday, and Friday, which is why you’ll see me put on this trade relatively frequently.)

BABA has options that expire each Friday

The more time left until an option expires, the more expensive it will be, because there’s more time on the shot clock for a move in the right direction. That’s called time value, and it decays at a rapid rate as expiration approaches.

And because I’m usually day-trading and not investing, I’m not a fan of paying for time value I don’t need.

That’s why, when I play options at all, I’m usually buying the contracts with just a day or less until the expiration buzzer. (Last Thursday, for instance, I was stalking BABA puts that expired at Friday’s close.)

  1. I buy at- or slightly in-the-money option contracts.

A call is “in the money” (ITM) when the stock price is trading above the strike price. A put, on the other hand, is ITM when the stock price is below the strike price.

On the flip side, a call is “out of the money” (OTM) when the stock is below the option’s strike, and a put is OTM when the stock is above the strike.

When a stock is trading around the strike price, that option – whether call or put – is considered “at the money” (ATM).

OTM options are the cheapest of the three, because they require a bigger chart move by the underlying shares in order to become ITM and gain intrinsic value

And while VWAP traders have certainly seen some monster moves in short order in 2021, a lot of times it’s not worth betting the stock will “cover a wide OTM spread” in time, so to speak.

By purchasing ATM options, I’m paying more than I would by buying OTM options, but giving myself a better chance to be profitable in time, because the distance to close on the charts is smaller.

The goal of buying the options is for the underlying stock to make a big enough move in the predicted direction before expiration.

In this best-case scenario, the intrinsic value of the option will increase, offsetting that rapid time decay, and I can sell to close the contracts for a profit before the bell.

2 More Critical VWAP Lessons

Now, as much as I absolutely loved trading the close with my Odd Couple better half last week, the price action in BABA on Friday reminded me of a few things:

  1. It pays to be patient in the morning.

During Friday’s earlier-than-usual LIVE trading session, we all watched as BABA shares initially went AGAINST my hopes from Thursday night, ultimately moving higher out of the gate.

In fact, the stock moved above the 1-minute VWAP in pre-market trading (shaded in gray below), which is often a short-term buy signal for me.

However, it didn’t take too long before BABA ran into a wall on the charts, and the shares ultimately broke back below the 1-minute VWAP within the first hour of the session

And you know what I say about THAT pattern, Blanche.

1-minute BABA chart on Aug. 20, 2021 – courtesy of Thinkorswim (TOS)
So while some Thursday-night BABA bears were likely kicking rocks to start Friday’s session, it reminded me that a lot of times, it pays to be PATIENT in the early hours… especially the first 15 minutes, when all the pre-market price action is playing out.

  1. REACTING to VWAP is still king.

Again, while there are MANY advantages to stalking stocks in after-hours and pre-market trading, the biggest is simply to plot levels to REACT AROUND – which can help determine potential entries and exits the next day, should VWAP tell you to put on a position.

In fact, I was reminded last week that it doesn’t always pay to hold anything overnight.

Sure, buyers of ATM BABA put options could’ve made some change, had they held the contracts into the stock’s afternoon lows Friday…

Make sure to check the room Announcements during the trading day
But had we just WAITED until the downside VWAP break to act – on BABA, Deere (DE), Applied Materials (AMAT), or any of the other stocks on Friday’s watchlist – we could’ve saved ourselves some early mental anguish.

In other words, last week once again proved to me why reacting to 1-minute VWAP – as opposed to betting on it beforehand – is still the safest way to play the only indicator you’ll ever need.

Stocks to Watch This Week

That said, quarterly earnings season is winding down, but there could be a few stragglers that pop up on my radar this week, including:

  1. Chinese stock and BABA peer JD.com (JD) reported earnings this morning
  2. Palo Alto Networks (PANW) reports tonight
  3. Several retailers will report this week, including Best Buy (BBY), Nordstrom (JWN), Dick’s (DKS), Guess (GES), Ulta (ULTA), Abercrombie & Fitch (ANF), Dollar General (DG), Dollar Tree (DLTR), Gap (GPS), and Big Lots (BIG)
  4. A few other stocks could also make earnings noise, like Salesforce (CRM), Toll Brothers (TOL), and Peloton (PTON)

Check out the earnings calendar near the bottom of the ThisIsVWAP.com home page for more.

Outside of earnings, TAL Education (TAL) is holding its annual shareholder meeting today, and considering the recent Chinese regulatory drama that hit BABA & Co, this one could move.

However, in order to see which stocks I REACT to this week, you gotta be in the room as I LIVE TRADE at 9:30 a.m. ET each day!

I’ll see you in there

Kenny “The Warlock” Glick



3 responses to “The Safest Way to Play the Only Indicator You Need”

  1. I’ll see you in the room. Enjoy!
    Keeping an eye on DKS. Was going to strangle it but then i thought i should just use the vwap, like you said.

  2. I will be there, Kenny!
    Others in my family (not me) lean toward the stage and take opportunities as they present themselves, as MCs and actresses in community events and theater. I appreciate your daily antics and recognize you are a stand-up comic in disguise.
    Rave on and keep doing what you do best. I love what you are able to do with VWAP.
    Warmest regards,

Leave a Reply

Your email address will not be published.