June 15th, 2022

Dear Reader,

Yesterday, we looked at a Daily Price Chart of EXACT Sciences Corp., noting the stock has been making a series of new 52-Week Lows since early May.

For today’s Trade of the Day we will be looking at an On Balance Volume chart for the Technology Select Sector SPDR Fund ETF, symbol: XLK.

Before breaking down XLK’s OBV chart let’s first review the investment objective of the ETF.

The XLK ETF seeks to track the performance of the index (Technology Sector), the fund employs a replication strategy, which means that the fund typically invests in substantially all of the securities represented in the index in approximately the same proportions as the index. It generally invests substantially all, but at least 95%, of its total assets in the securities comprising the index.

Confirming a Price Downtrend with OBV

The XLK daily price chart below shows that XLK is in a price downtrend as the current price is below the price XLK 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 XLK 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 XLK

Since XLK’s OBV line is sloping down, the most likely future price movement for XLK is down, making XLK a good candidate for a Put Option purchase.

Let’s use the Hughes Optioneering calculator to look at the potential returns for an XLK Put Option purchase.

The Put Option Calculator will calculate the profit/loss potential for a put option trade based on the price change of the underlying stock/ETF at option expiration in this example from a flat XLK price to a 12.5% decrease.

The Optioneering Team uses the 1% Rule to select an option strike price with a higher percentage of winning trades. In the following XLK option example, we used the 1% Rule to select the XLK 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 an XLK in-the-money option strike price, XLK only has to decrease 1% for the option to breakeven and start profiting! Remember, if you purchase an at-the-money or out-of-the-money put 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 the XLK ETF is flat at 125.34 at option expiration, it will only result in a 7.3% loss for the XLK option compared to a 100% loss for an at-the-money or out-of-the-money put 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 put 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 XLK on 6/14/2022 before commissions.

When you purchase a put option, there is virtually no limit on the profit potential of the put if the underlying stock continues to move down in price.

For this specific put option, the calculator analysis below reveals if XLK decreases 5.0% at option expiration to 119.07(circled), the put option would make 38.7% before commission.

If XLK decreases 10.0% at option expiration to 112.81 (circled), the put option would make 84.6% before commission and greatly outperform the ETF.

The leverage provided by put options allows you to maximize potential returns on bearish ETFs.

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.

Hughes Optioneering Strategies Perform In All Markets

This isn’t Chuck’s first bear market…

Over the past 20+ years, Chuck’s strategies have proven to perform, even in the most volatile markets.

His strategies championed market corrections, the Dot-Com Crash, and the 2008 Great Recession.

This is your chance to gain access to his proven strategies and start receiving hand-picked trades from 10-Time Trading Champion!

Just call Brad at 1-866-661-5664 or 1-310-647-5664 to join and use the code “Optioneering VIP” to receive special pricing.

You can also CLICK HERE to schedule a call! 

Wishing You the Best in Investing Success,

Chuck Hughes

Editor, Trade of the Day

Have any questions? Email us at dailytrade@chuckstod.com