Today I am going to walk you through a great potential trade, states Chuck Hughes of Hughes Optioneering.
Not only will we look at which ticker is set up, but I will also lay out the amazing indicator that helped me spot this one and many others. In this example chart of PACCAR, Inc. (PCAR), the On Balance Volume is showing us what we need to know.
Confirming a Price Uptrend with OBV
On Balance Volume measures volume flow with a single Easy-to-Read Line. Volume flow precedes price movement and helps sustain the price uptrend. 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.
We can see from the OBV chart below that the On Balance Volume line for PCAR 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.
Confirmed ‘Buy’ Signal for PCAR
Since PCAR’s OBV line is sloping up, the most likely future price movement for PCAR is up, making PCAR a good candidate for a stock purchase or a call option spread. Let’s use the Hughes Optioneering calculator to look at the potential returns for a PCAR debit spread.
Built-in Profit Potential
For this option spread, the calculator analysis below reveals the cost of the spread is $300 (circled). The analysis reveals that if PCAR stock is flat, up at all, or down 7.5% at expiration the spread will realize a 66.7% return (circled). Due to option pricing characteristics, this option spread has a ‘built-in’ 66.7% profit potential when the trade was identified.
The prices and returns represented below were calculated based on the current stock and option pricing for PCAR on 2/21/2024 before commissions.
