Yesterday, we looked at a Daily Price Chart of TransDigm Group Inc., noting the stock has recently made a series of new 52-Week Highs.
For today’s Trade of the Day we will be looking at an On Balance Volume chart for Progressive Corp. stock symbol: PGR.
Before breaking down PGR’s OBV chart let’s first review which products and services are offered by the company.
The Progressive Corporation, an insurance holding company, provides personal and commercial auto, personal residential and commercial property, general liability, and other specialty property-casualty insurance products and related services in the United States. It operates in three segments: Personal Lines, Commercial Lines, and Property.
Confirming a Price Uptrend with OBV
The PGR daily price chart below shows that PGR is in a price uptrend as the current price is above the price PGR 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 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 PGR 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 PGR
Since PGR’s OBV line is sloping up, the most likely future price movement for PGR is up, making PGR a good candidate for a stock purchase or a call option purchase.
Let’s use the Hughes Optioneering calculator to look at the potential returns for a PGR 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 PGR 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 PGR option example, we used the 1% Rule to select the PGR 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 PGR in-the-money option strike price, PGR stock 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 stock closes flat at option expiration it will result in a 100% loss for your option trade! In this example, if PGR stock is flat at 138.37 at option expiration, it will only result in a 1.7% loss for the PGR 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 stocks.
The prices and returns represented below were calculated based on the current stock and option pricing for PGR on 2/8/2023 before commissions.
When you purchase a call option, there is no limit on the profit potential of the call if the underlying stock continues to move up in price.
For this specific call option, the calculator analysis below reveals if PGR stock increases 5.0% at option expiration to 145.29 (circled), the call option would make 49.2% before commission.
If PGR stock increases 10.0% at option expiration to 152.21 (circled), the call option would make 100.1% before commission and outperform the stock return 10 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 profit opportunities 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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