Yesterday, we looked at a Daily Price Chart of Roku, Inc., noting the stock’s 1-Month Price is trading below the 10-Month SMA signaling a ‘Sell’.
For today’s Trade of the Day we will be looking at an On Balance Volume chart for Evolent Health, Inc. stock symbol: EVH.
Before breaking down EVH’s OBV chart let’s first review which products and services are offered by the company.
Evolent Health, Inc., a healthcare company, through its subsidiary, Evolent Health LLC, provides clinical and administrative solutions to payers and providers in the United States. It operates in two segments, Evolent Health Services and Clinical Solutions. The Evolent Health Services segment provides an integrated administrative and clinical platform for health plan administration and population health management.
Confirming a Price Uptrend with OBV
The EVH daily price chart below shows that EVH is in a price uptrend as the current price is above the price EVH 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 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 EVH 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 uptrend.
Confirmed ‘Buy’ Signal for EVH
Since EVH’s OBV line is sloping up, the most likely future price movement for EVH is up, making EVH 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 an EVH debit spread.
The Call Option Spread Calculator will calculate the profit/loss potential for a call option spread based on the price change of the underlying stock/ETF at option expiration in this example from a 7.5% increase to a 7.5% decrease in EVH stock at option expiration.
The goal of this example is to demonstrate the ‘built in’ profit potential for option spreads and the ability of spreads to profit if the underlying stock is up, down or flat at option expiration. Out of fairness to our paid option service subscribers we don’t list the option strike prices used in the profit/loss calculation.
The prices and returns represented below were calculated based on the current stock and option pricing for EVH on 8/3/2022 before commissions.
Built in Profit Potential
For this option spread, the calculator analysis below reveals the cost of the spread is $330 (circled). The maximum risk for an option spread is the cost of the spread.
The analysis reveals that if EVH stock is flat or up at all at expiration the spread will realize a 51.5% return (circled).
And if EVH stock decreases 7.5% at option expiration, the option spread would make a 12.9% return (circled).
Due to option pricing characteristics, this option spread has a ‘built in’ 51.5% profit potential when the trade was initiated*.
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 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.
Trade High Priced Stocks for $350 With Less Risk
One of the big advantages to trading option spreads is that spreads allow you to trade high price stocks like Amazon, Google, or Netflix for as little as $350. With an option spread you can control 100 shares of Google for $350. If you were to purchase 100 shares of Google at current prices it would cost about $11,800. With the stock purchase you are risking $11,800 but with a Google option spread that costs $350 your maximum risk is $350 so your dollar risk is lower with option spreads compared to stock purchases.
Get Trade Insights Directly From Chuck
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See what he’s trading and when with his exclusive Inner Circle Trading Service where he will send you his hand-picked stock and option trades.
Just call Brad at 1-866-661-5664 or 1-310-647-5664 to join or CLICK HEREto schedule a call!
Wishing You the Best in Investing Success,
Editor, Trade of the Day
Have any questions? Email us at email@example.com
*Trading incurs risk and some people lose money trading.