When I trade around the VWAP I am always a stock-first kind of guy.
But I know a lot of you out there want to use options to trade around the VWAP.
And that's perfectly fine to do...
But you absolutely have to be sure you know what you're doing.
I've seen way to many people blow up their accounts playing options because they are mis-informed about how they work.
So let's talk options today.
Options are not stocks. They are bets on stocks.
I know that may sound strange, but it helps you understand better why they act the way they do.
For instance, options at the very beginning of the day are always going to be out of whack.
That's because the market needs to catch up to properly price the contracts.
If a stock moves 25% overnight, not only are you pricing in the new price for the option but there's a whole slew of other factors that go into it like implied volatility, how much more market makers think the stock will move, and retail traders trying to sell their options for ridiculously low or high prices.
Furthermore, the first few minutes of the day for a stock is usually extremely volatile.
And sometimes, even if a stock is trending toward a certain direction, you will get "chopped up" on your options...
Meaning, you won't be able to get a good price for your contracts because the extra volatility is making people wary of the where the actual price will end.
This then reveals my first knowledge bomb of the day: Never trade options at the opening bell.
If you wait five to fifteen minutes for the markets to calm down, you'll get a much better bang for your buck.
But Kenny, how do I know what options to pick? I hear you say.
Well, that's actually very easy to answer.
Let's say you missed the first move on Goldman Sachs (GS) this morning.
You were waiting for it to come back down for a potential buy. You saw that it dipped below to the VWAP double-bottomed, and was breaking VWAP at 10:07 am at the price of $329.50.
What you would do in this case is look to be the at the money calls at the nearest expiration date.
We do it this way to mimic the movement of the stock the best we can.
In our example I said earlier, we would have bought the $330 GS calls expiring on April 28, 2023.
Buying two of these options could have gotten you from $5.43 per contract up to $8.00.
Two of those contracts puts a quick $250 in your pocket.
If you're still confused on how to optionize your VWAP trades, click here for video guide.
Like I said though, I'm always a stock first kind of guy.
The only time that I'll start playing options is when I want to put a couple lotto plays on.
But let me be perfectly clear - you should only put on lotto plays when you have money in hand from the day.
That's why they're called lotto plays. You're gambling with your money when I do this.
That's not to say they don't work though...
In fact, just today I gave a lotto play to the members of the Warlock's Room.
And it netted members over 50% gains in less than 30 minutes.
Don't believe me? Check out this clip by clicking here or the video below...
And remember, earnings season is upon us!
That means we're in the thick of it with earnings reversals happening every day.
I meet with my lifetime members of the Warlock's World before the market even begins. And I tell them exactly what to look for during the day.
You can be a part of these sessions and set yourself up well before the day starts by joining me today.
And on top of that, we're offering people to sign up on a special monthly offer.
Click here to join me today in the Warlock's World.
The post Here's How to Use Options on VWAP Trades appeared first on This Is VWAP.
About the Author