For today’s trade of the day, we will be looking at an On Balance Volume chart for Cisco Systems, Inc. (CSCO), states Chuck Hughes of Hughes Optioneering.
Before breaking down CSCO’s OBV chart let’s first review which products and services are offered by the company. Cisco Systems, Inc. designs, manufactures, and sells Internet Protocol-based networking and other products related to the communications and information technology industry in the Americas, Europe, the Middle East, Africa, the Asia Pacific, Japan, and China.
Confirming a Price Uptrend With OBV
The CSCO daily price chart below shows that CSCO is in a price uptrend as the current price is above the price CSCO traded at six months ago (circled). The On Balance Volume chart is below the daily chart. On Balance Volume measures volume flow with a single Easy-to-Read Line. Volume flow precedes price movement and helps sustain the price downtrend. When a stock closes up, volume is added to the line. When a stock closes down, volume is subtracted from the line. A cumulative total of these additions and subtractions form the OBV line.
On Balance Volume Indicator
- When Close is Up, Volume is Added
- When Close is Down, Volume is Subtracted
- A Cumulative Total of Additions and Subtractions from the OBV Line
We can see from the OBV chart below that the On Balance Volume line for CSCO is sloping up. An up-sloping line indicates that the volume is heavier on up days and buying pressure is exceeding selling pressure. Buying pressure must continue to exceed selling pressure in order to sustain a price uptrend. So, On Balance Volume is a simple indicator to use that confirms the price uptrend and its sustainability. The numerical value of the On Balance Volume line is not important. We simply want to see an up-sloping line to confirm a price uptrend.
Confirmed ‘Buy’ Signal for CSCO
Since CSCO's OBV line is sloping up, the most likely future price movement for CSCO is up, making CSCO a good candidate for a stock purchase or a call option purchase. Let's use the Hughes Optioneering calculator to look at the potential returns for a CSCO call option purchase. The Call Option Calculator will calculate the profit/loss potential for a call option trade based on the price change of the underlying stock/ETF at option expiration in this example from a flat CSCO price to a 12.5% increase.
The Optioneering Team uses the 1% Rule to select an option strike price with a higher percentage of winning trades. In the following CSCO option example, we used the 1% Rule to select the CSCO option strike price but out of fairness to our paid option service subscribers, we don’t list the strike price used in the profit/loss calculation.
Trade With Higher Accuracy
When you use the 1% Rule to select a CSCO in-the-money option strike price, CSCO stock only has to increase by 1% for the option to break even and start profiting! Remember, if you purchase an at-the-money or out-of-the-money call option and the underlying stock closes flat at option expiration it will result in a 100% loss for your option trade! In this example, if CSCO stock is flat at 53.11 at option expiration, it will only result in an 8.7% loss for the CSCO option compared to a 100% loss for an at-the-money or out-of-the-money call option.
Using the 1% Rule to select an option strike price can result in a higher percentage of winning trades compared to at-the-money or out-of-the-money call options. This higher accuracy can give you the discipline needed to become a successful options trader and can help avoid 100% losses when trading options. The goal of this example is to demonstrate the powerful profit potential available from trading options compared to stocks.
The prices and returns represented below were calculated based on the current stock and option pricing for CSCO on 7/24/2023 before commissions. When you purchase a call option, there is no limit on the profit potential of the call if the underlying stock continues to move up in price. For this specific call option, the calculator analysis below reveals if CSCO stock increases 5.0% at option expiration to 55.77 (circled), the call option would make 43.9% before the commission.
If CSCO stock increases 10.0% at option expiration to 58.42 (circled), the call option would make 96.5% before the commission and outperform the stock return by nearly ten to one. The leverage provided by call options allows you to maximize potential returns on bullish stocks. The Hughes Optioneering Team is here to help you identify profit opportunities just like this one.