One truly elementary screening method I consistently use to find stocks as they are breaking out to the upside is checking the daily “New 52-Week Highs” list. And one stock in particular stood above the rest in a recent screen: SAP SE (SAP), observes Chuck Hughes, co-founder of Hughes Optioneering.
You can see below in the current chart of SAP that the stock is displaying exactly the type of bullish breakout that I’m looking for. SAP shares have been making a series of new 52-week highs over the past few trading days.
The reason that I look for stocks that have recently made a series of new 52-week highs is that generally there is strong conviction from investors, which translates to strong buying pressure for the stock. This flood of buying pressure will result in the stock making a move higher.
Oftentimes, once a stock makes a series of new highs, the breakout is not over and done with. In fact, in many cases, it’s just getting started. In powerful bull markets, stocks breaking out to the upside can often continue to trade higher for longer than most investors may think.
When I spot a stock with a compelling breakout like SAP, I add it to my ‘Buy List’ and keep an eye out for a good trade setup. In this case, you could simply buy the shares, which we sometimes do. But many times when we spot a setup like this, we want to add a bit more leverage to our position to unlock more explosive profit potential.
We like to find a call option to purchase. By doing this, should the bullish trend continue, our trade is positioned to produce higher profits when compared to just owning the underlying shares.
When selecting which call option to purchase, I often rely on my “1% Rule” to help narrow down my choice of option strikes. The 1% Rule helps me select an in-the-money option that has a higher probability of producing a profit when compared to an at-the-money or out-of-the money option.
Once I have one selected, I will vet the trade using my Call Option Purchase calculator to determine the trade’s profit potential.
