| YETI Confirming Price Uptrend |
Dear Reader,
On Friday, we looked at a Daily Price Chart of EverQuote Inc., noting the stock's 50-Day EMA is trading above the 100-Day EMA signaling a bullish trend.
For today's Trade of the Day we will be looking at an On Balance Volume chart for Yeti Holdings Inc. stock symbol: YETI.
Before breaking down YETI's OBV chart let's first review which products and services are offered by the company.
YETI Holdings, Inc. designs, markets, retails, and distributes products for the outdoor and recreation market under the YETI brand in the United States, Canada, Australia, and Japan. The company offers hard and soft coolers, as well as storage, transport, outdoor living, and associated accessories. It also provides drinkware products, including colsters, lowballs, stackable pints, mugs, tumblers, bottles, and jugs, as well as accessories comprising bottle straw caps, tumbler handles, and jug mounts under the Rambler brand.
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Confirming a Price Uptrend with OBV |
The YETI daily price chart below shows that YETI is in a price uptrend as the current price is above the price YETI 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 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 YETI 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 YETI Is Down 10% |
Now, since YETI's OBV line is trending up and the stock will likely continue its rally from here, let's use the Optioneering calculator to look at the potential returns for a YETI covered call trade. Covered calls are also known as buy writes.
The Buy Write Calculator will calculate the profit/loss potential for a covered call trade based on the price change of the underlying stock/ETF at option expiration in this example from a 10% increase to a 10% decrease in YETI stock at option expiration.
The goal of this example is to demonstrate the 'built in' profit potential for covered calls and the ability of covered calls 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 price used in the profit/loss calculation. The prices and returns represented below were calculated based on the current stock and option pricing for YETI on 6/26/2020 before commissions.
Our initial price target for YETI is 45.75 per share.
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| | | | Built in Profit Potential
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For this covered call, the calculator analysis below reveals the cost or the breakeven price is $3,404 (circled). The maximum risk for a covered call is the cost of the covered call.
The analysis reveals that if YETI is flat at 41.54 at expiration the covered call will realize a $750 profit and a 22.0% return (circled).
If YETI increases at all at option expiration, the covered call will realize a $846 profit and a 24.9% return.
And if YETI decreases 10% at option expiration, the covered call will realize a $334.60 profit and a 9.8% return.
Due to option pricing characteristics, this covered call has a 'built in' 22.0% profit potential when the trade was initiated.
Covered call trades can result in a higher percentage of winning trades compared to a directional stock 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 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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| 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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