When there are blue skies above, the conditions are often good for a great day in my playground, The Flatirons in Boulder, Colorado:
The hiking trails here are beautiful. And when the air is cool and the sky is blue like this -- nothing beats it. The potential for good fun outdoors is seemingly unlimited.
Similarly, when a stock I own breaks out to a new all-time high, I like to call these Blue Sky Breakouts. Why? Because there's nothing overhead. No supply from previous owners who are looking to get out at breakeven or minimize losses. Everyone who bought this stock -- regardless of when they bought it or the price paid -- is making money. Everyone. And generally speaking, investors and traders who are holding a winning position aren't often in a hurry to sell.
Meanwhile, any trader who is unfortunate enough to be holding a short position in a stock making a new all time high? They are losing money. And the losses are getting larger in percentage terms every tick higher, with no limit to what they can lose. The only way to stop the losing is to buy the stock to cover their short positions. These traders become fuel for further buying to continue sending the stock higher.
On May 22nd, NetApp $NTAP broke above $136, marking a new all-time high. That was the signal for me to buy in my Blue Skies trading account (an account I have specifically for trading these types of breakouts). And so I did, buying the July 155 calls for $5.62 a piece.
Why am I buying a stock at the absolute highest price it's ever printed? Some of you might think I'm crazy. I wouldn't argue with you on that point.
But is buying a stock making new all-time highs crazy?
The laws of math indicate that if a stock comes public at $10, to get to $100 it's going to be making new highs all along the way at $11, $15, $47, $63, $84, etc. Are the people who bought at any of those prices crazy when the stock is sitting at $100?
Four days after my entry following a well-received earnings report, $NTAP is ripping higher:
At the time of this typing, those July 155 calls I purchased for $5.62 are trading at $30 per contract.
Could this be the end of the run for $NTAP? It's entirely possible. But that's not the bet I'm making. I'm going to continue holding my position, betting that blue skies overhead will persist and the path of least resistance is higher.
The most bullish thing a stock can do is print a new-all-time high. And when you see one, they rarely exist in isolation. All-time highs are normally followed by more all-time highs in quick succession.
