May 9th, 2022
On Friday, we looked at a Daily Price Chart of Carvana Co., noting the stock’s 24/52 Day MACD is trading below the 18-Day EMA signaling a ‘Sell’.
For today’s Trade of the Day we will be looking at an On Balance Volume chart for JD.com, Inc. stock symbol: JD.
Before breaking down JD’s OBV chart let’s first review which products and services are offered by the company.
JD.com, Inc. provides supply chain-based technologies and services in the People’s Republic of China. The company offers computers, communication, and consumer electronics products, as well as home appliances; and general merchandise products comprising food, beverage and fresh produce, baby and maternity products, furniture and household goods, cosmetics and other personal care items, pharmaceutical and healthcare products, books, automobile accessories, apparel and footwear, bags, and jewelry.
Confirming a Price Downtrend with OBV
The JD daily price chart below shows that JD is in a price downtrend as the current price is below the price JD 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 trend. 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 JD is sloping down. A down-sloping line indicates that the volume is heavier on down days and selling pressure is exceeding buying pressure. Selling pressure must continue to exceed buying pressure in order to sustain a price downtrend. So, On Balance Volume is a simple indicator to use that confirms the price downtrend and its sustainability.
The numerical value of the On Balance Volume line is not important. We simply want to see a down-sloping line to confirm a price downtrend.
Confirmed ‘Sell’ Signal for JD
Since JD’s OBV line is sloping down, the most likely future price movement for JD is down, making JD a good candidate for a bearish position such as a put option spread.
Let’s use the Hughes Optioneering calculator to look at the potential returns for a JD debit spread.
The Put Option Spread Calculator will calculate the profit/loss potential for a put option spread based on the price change of the underlying stock/ETF at option expiration in this example from a 7.5% decrease to a 7.5% increase in JD 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 JD on 5/6/2022 before commissions.
Built in Profit Potential
For this option spread, the calculator analysis below reveals the cost of the spread is $327 (circled). The maximum risk for an option spread is the cost of the spread.
The analysis reveals that if JD stock is flat or down at all at expiration the spread will realize a 52.9% return (circled).
And if JD stock increases 7.5% at option expiration, the option spread would make a 52.9% return (circled).
Due to option pricing characteristics, this option spread has a ‘built in’ 52.9% 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 $231,000. With the stock purchase you are risking $231,000 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.
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Wishing You the Best in Investing Success,
Editor, Trade of the Day
Have any questions? Email us at email@example.com
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