Tales of a Technician: Trading Bull Calls Around Earnings
February 22, 2021
Mariana asked a great question regarding trading bull call spreads around earnings. Read her query below, then see my response.
“In regards to DKS’s earnings coming up on 3/9, if I were to enter a bull call, what is good guidance on expiration, Weeklys 12 MAR or regular 19 MAR and exit prior to earnings or something else?”
Mariana
DKS made the options report because of the clean bull retracement pattern. And since the next earnings report wasn’t scheduled for 15 days, we had just enough time to consider a swing trade. As a reminder, if earnings is scheduled within ten days, then it disqualifies a stock for the report.
Still, 15 days doesn’t leave a ton of time, so for those unwilling to ride into earnings, this predetermines the max length of the trade at about two weeks.
First, let’s address strategy selection. Then I’ll zero in on the bull call expiration question.
In a situation like this, I wouldn’t typically consider cash flow plays like naked puts, bull puts, or covered calls. First, the short time horizon doesn’t really allow time decay to work its magic. Second, all three of these strategies are negative vega. And with implied volatility likely to rise ahead of earnings, I’m essentially swimming upstream here.
Directional plays, then, are the only way to go – if I’m going to go at all. Buying stock is the simplest route, but I think long calls work as well. The shorter trade duration (again, dictated by the looming earnings report), means you won’t have to worry much about time decay. And the likely bump in implied vol will work to your advantage. That said, I’d still buy out at least a month, if not two, to minimize the time decay while in the position,
Bull call spreads could also work, but this is where things get tricky. I’m still a fan of exiting prior to earnings, so the question is which expiration month you should use. I’m always partial to the monthly cycle because of the superior liquidity. This is especially true with DKS. There’s hardly any open interest in the 12 March series. So, of the two choices offered by Mariana above, I much prefer 19 March.
Since the max trade length is two weeks, I see little reason to go far out in time such as to June or September. But, I think a case could be made for buying April bull calls if you wanted something more conservative than the 19 March. I would simplify the decision as follows:
19 March Bull Call: More Aggressive – make money faster, lose money faster
16 April Bull Call: More Conservative – make money slower, lose money slower
Pick Your Poison
Thanks for the question. I trust my response provided some clarity.
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Yes, yes. Makes sense. Thank you for taking time to elaborate!
-Mariana