| 50.6% Built-In Profit Potential for PANW |
Dear Reader,
Yesterday, we looked at a Daily Price Chart of Lululemon Athletica Inc., noting the stock has been making a series of higher highs and higher lows since mid-March.
For today's Trade of the Day we will be looking at an On Balance Volume chart for Palo Alto Networks Inc. stock symbol: PANW.
Before breaking down PANW's OBV chart let's first review which products and services are offered by the company.
Palo Alto Networks, Inc. provides security platform solutions worldwide. The company provides firewall appliances and software; Panorama, a security management solution for the control of appliances deployed on an end-customer's network as a virtual or a physical appliance; and Virtual System Upgrades, which are available as extensions to the virtual system capacity that ships with physical appliances. It also offers subscription services covering the areas of threat prevention, uniform resource locator filtering, malware and persistent threat, laptop and mobile device protection, and firewall, as well as cyber-attack, threat intelligence, and content control.
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Confirming a Price Uptrend with OBV |
The PANW daily price chart below shows that PANW is in a price uptrend as the current price is above the price PANW traded at three 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 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 PANW 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 up trend.
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Profit if PANW is Up, Down or Flat
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Now, since PANW's OBV line is sloping up and the stock will likely rally from here, let's use the Hughes Optioneering calculator to look at the potential returns for a PANW call option 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 10.0% increase to a 10.0% decrease in PANW 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 PANW on 5/26/2020 before commissions.
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| | | | 50.6% Built in Profit Potential
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For this option spread, the calculator analysis below reveals the cost of the spread is $332 (circled). The maximum risk for an option spread is the cost of the spread.
The analysis reveals that if PANW is flat or up at all at expiration the spread will realize a 50.6% return (circled).
And if PANW decreases 10.0% at option expiration, the option spread would make a 50.6% return (circled).
Due to option pricing characteristics, this option spread has a 'built in' 50.6% 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.
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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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One of the big advantages to trading option spreads is that spreads allow you to trade high price stocks like Amazon, Google, Netflix or Apple for as little as $350. With an option spread you can control 100 shares of Apple for $350. If you were to purchase 100 shares of Apple at current prices it would cost about $30,000. With the stock purchase you are risking $30,000 but with an Apple 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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| Chuck is offering special pricing for his Inner Circle Trading Service for Trade of the Day subscribers.
You can start receiving hand-picked trades from Chuck today!
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!
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Wishing You the Best in Investing Success,
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| | Chuck Hughes Editor, Trade of The Day
Have any questions? Email us at dailytrade@chuckstod.com |
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