For today’s trade of the day, we will be looking at an On Balance Volume chart for Booz Allen Hamilton Corp. (BAH), states Chuck Hughes of Hughes Optioneering.
Before breaking down BAH’s OBV chart let’s first review which products and services are offered by the company. Booz Allen Hamilton Holding Corporation provides management and technology consulting, analytics, engineering, digital solutions, mission operations, and cyber services to governments, corporations, and not-for-profit organizations in the United States and internationally.
Confirming a Price Uptrend with OBV
The BAH daily price chart below shows that BAH is in a price uptrend as the current price is above the price BAH traded at five 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
Volume flow precedes price and is the key to measuring the validity and sustainability of a price trend. We can see from the OBV chart below that the On Balance Volume line for BAH 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 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 BAH
Since BAH's OBV line is sloping up, the most likely future price movement for BAH is up, making BAH 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 BAH 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 BAH 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 BAH option example, we used the 1% Rule to select the BAH 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 BAH in-the-money option strike price, BAH 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 BAH stock is flat at 123.33 at option expiration, it will only result in a 1.6% loss for the BAH 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 BAH on 8/1/2023 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 BAH stock increases 5.0% at option expiration to 129.50 (circled), the call option would make 43.9% before the commission.
If BAH stock increases 10.0% at option expiration to 135.66 (circled), the call option would make 89.4% before the commission and outperform the stock return nearly nine to one. The leverage provided by call options allows you to maximize potential returns on bullish stocks.
