Buying Volume Surges for Gas Engine Giant

Dear Reader,

Today I’m going to show you my newest pick as well as the indicator I used to find it!

For today’s Trade of the Day we will be looking at Cummins Inc. (CMI). Cummins Inc. is a leading global designer, manufacturer and distributor of diesel and natural gas engines and powertrain-related component products. Powertrain components include fuel systems, turbochargers, transmissions, batteries and electrified power systems, among others.

Confirming a Price Uptrend with OBV

The CMI daily price chart below shows that CMI is in a price uptrend as the current price is above the price CMI 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 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 CMI 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.

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Confirming the ‘Buy’ Signal

Since CMI’s OBV line is sloping up, the most likely future price movement for CMI is up, making CMI 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 CMI debit spread.

Profit Potential Without Stock Movement!

For this option spread, the calculator analysis below reveals the cost of the spread is $630 (circled). The maximum risk for an option spread is the cost of the spread.

The analysis reveals that if CMI stock is flat, up at all, or down 7.5% at expiration the spread will realize a 58.7% return (circled).

Due to option pricing characteristics, this option spread has a ‘built in’ 58.7% profit potential when the trade was identified*.

The prices and returns represented below were calculated based on the current stock and option pricing for CMI on 4/11/2024 before commissions.

Interested in accessing the Optioneering Calculators? Join one of Chuck’s Trading Services for unlimited access! The Optioneering Team has option calculators for six different option strategies that allow you to calculate the profit potential for an option trade before you take the trade.

Option spread trades can result in a higher percentage of winning trades compared to a directional option trade if you can profit when the underlying stock/ETF is up, down or flat.

A higher percentage of winning trades can give you the discipline needed to become a successful trader.

The Hughes Optioneering Team is here to help you identify profit opportunities just like this one.

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Wishing You the Best in Investing Success,