Profit if Financial ETF Drops 10%

December 31st, 2020 Profit if Financial ETF Drops 10% Dear Reader, Yesterday, we looked at a Monthly Price Chart for Fastenal Co., noting that the stock's 1-Month Price is trading above the 10-Month SMA signaling a 'Buy'. For today's Trade of the Day we will be looking at an On Balance Volume chart for Direxion Financial Bull 3X ETF symbol: FAS. Before breaking down FAS's daily price chart let's first review the investment objective of the ETF. The investment seeks daily investment results, before fees and expenses, of 300% of the daily performance of the Russell 1000 Financial Services Index. Confirming a Price Uptrend with OBV The FAS daily price chart below shows that FAS is in a price uptrend as the current price is above the price FAS 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 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 FAS 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.

Confirmed 'Buy' Signal For FAS Since FAS's OBV line is sloping up, the most likely future price movement for FAS ETF is up, making FAS a good candidate for an ETF purchase or a covered call trade. Let's use the Hughes Optioneering calculator to look at the potential returns for an FAS covered call. 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 the FAS ETF 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 ETF 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 the FAS ETF on 12/30/2020 before commissions.

Built in Profit Potential For this covered call, the calculator analysis below reveals the cost or the breakeven price is $4,474 (circled). The maximum risk for a covered call is the cost of the covered call. The analysis reveals that if the FAS ETF is flat at 58.57 at expiration the covered call will realize a $1,326.00 profit and a 29.6% return (circled). If FAS increases 10.0% at option expiration, the covered call will realize a $1,326.00 profit and a 29.6% return. And if FAS decreases 10% at option expiration, the covered call will realize a $797.30 profit and a 17.8% return. Due to option pricing characteristics, this covered call has a 'built in' 29.6% 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.

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.

Special Offer for Trade of the Day Members I want to start sending YOU trades! And since you are a Trade of the Day subscriber I'm giving you a special discount on my trading service. 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! Wishing You the Best in Investing Success,

Chuck Hughes Editor, Trade of the Day

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