While many traders approach earning season by looking for implied volatility based mean reversion trades, I like to use weekly options to take directional plays.
Halliburton (HAL) reports earnings on January 21st before the market open. Through technical analysis, I identified a strong bullish pattern. By tracking the option volume, I noticed there has been a lot of call buyers ahead of the report as well. I am bullish the entire sector considering the current geo political realities, and there is no question that the behemoth HAL is an industry leader.
Trade Set Up
I am looking for a trade set up with the correct reward to risk for a bullish play to be appropriate. The stock has traded between $50 and $51 for the past few days so I narrowed the choices down to two. The first one was the January 24 /February 53 call calendar. Priced at approximately $0.21, I believe it had a maximum profitability of ~0.39. That affords me a reward/risk ratio of 1.85:1.
The second set up was the one I chose:
Buy the weekly January 24 51/53 call spread for $0.55-$.60 with the stock trading above $50. That affords me a reward to risk ratio of 2.63:1.
If I am going to allocate the same dollar amount to the trade, clearly the vertical call spread is the better bet. It has a better risk ratio. But if you didn’t want to put a lot of capital towards a directional play into earnings, you could do the calendar. It’s cheaper in absolute dollar terms.
