June 2nd, 2022
Yesterday, we looked at a Daily Price Chart of Uber Technologies, Inc., noting the stock is trading in the Keltner Channel ‘Sell Zone’.
For today’s Trade of the Day we will be looking at an On Balance Volume chart for the Invesco DB Commodity Index Tracking Fund ETF, symbol: DBC.
Before breaking down DBC’s OBV chart let’s first review the investment objective of the ETF.
The DBC ETF pursues its investment objective by investing in a portfolio of exchange-traded futures on Light Sweet Crude Oil, Heating Oil, RBOB Gasoline, Natural Gas, Brent Crude, Gold, Silver, Aluminum, Zinc, Copper Grade A, Corn, Wheat, Soybeans, and Sugar. The index is composed of notional amounts of each of these commodities.
Confirming a Price Uptrend with OBV
The DBC daily price chart below shows that DBC is in a price uptrend as the current price is above the price DBC 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 uptrend. When an ETF closes up, volume is added to the line. When an ETF 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 form 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 DBC 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 up trend.
Confirmed ‘Buy’ Signal for DBC
Since DBC’s OBV line is sloping up, the most likely future price movement for DBC is up, making DBC a good candidate for an ETF purchase or a call option purchase.
Let’s use the Hughes Optioneering calculator to look at the potential returns for a DBC 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 DBC 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 DBC option example, we used the 1% Rule to select the DBC 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 DBC in-the-money option strike price, the DBC ETF only has to increase 1% for the option to breakeven and start profiting! Remember, if you purchase an at-the-money or out-of-the-money call option and the underlying ETF closes flat at option expiration it will result in a 100% loss for your option trade! In this example, if DBC is flat at 29.00 at option expiration, it will only result in a 1.6% loss for the DBC 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 option 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 ETFs.
The prices and returns represented below were calculated based on the current ETF and option pricing for DBC on 6/1/2022 before commissions.
When you purchase a call option, there is no limit on the profit potential of the call if the underlying ETF continues to move up in price.
For this specific call option, the calculator analysis below reveals if the DBC ETF increases 5.0% at option expiration to 30.45 (circled), the call option would make 45.9% before commission.
If the DBC ETF increases 10.0% at option expiration to 31.90 (circled), the call option would make 93.4% before commission and outperform the ETF return more than 9 to 1.
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 winning trades just like this one.
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.
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Wishing You the Best in Investing Success,
Editor, Trade of the Day
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