For today’s trade of the day, we will be looking at an On Balance Volume chart for KLA Corp. (KLAC), states Chuck Hughes of Hughes Optioneering.
Before breaking down KLAC’s OBV chart, let’s first review which products and services are offered by the company. KLA Corporation is an original equipment manufacturer of process diagnostics and control equipment and yield management solutions required for the fabrication of semiconductor integrated circuits or chips. The company has a comprehensive portfolio of products addressing each major PDC subsegment’s photomask (reticle) inspection, wafer inspection/defect review, and metrology. Reticle production is vital to the semiconductor device formation process.
Confirming a Price Uptrend with OBV
The KLAC daily price chart below shows that KLAC is in a price uptrend as the current price is above the price KLAC 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 KLAC is sloping up. An up-sloping line indicates that the volume is heavier on up days and that 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 uptrend.
Confirmed ‘Buy’ Signal for KLAC
Since KLAC’s OBV line is sloping up, the most likely future price movement for KLAC is up, making KLAC a good candidate for a stock purchase or a call option spread. Let’s use the Hughes Optioneering calculator to look at the potential returns for a KLAC debit 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 7.5% increase to a 7.5% decrease in KLAC 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 KLAC on 3/5/2024 before commissions.
Built in Profit Potential
For this option spread, the calculator analysis below reveals the cost of the spread is $640 (circled). The maximum risk for an option spread is the cost of the spread. The analysis reveals that if KLAC stock is flat or up at all at expiration, the spread will realize a 56.2% return (circled). And if KLAC stock decreases 7.5% at option expiration, the option spread would make a 56.2% return (circled).
Due to option pricing characteristics, this option spread has a ‘built in’ 56.2% profit potential when the trade was identified. 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.
