Today I am going to walk you through a great potential trade. Not only will we look at which ticker is setting up, I will layout 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 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.

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.

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Why I Love Trading Option Spreads

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.

Wishing You the Best in Investing Success,

Chuck Hughes

Editor, Trade of the Day

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*Trading incurs risk and some people lose money trading.