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3 Breakout Stocks to Buy for Huge Upside

breakout stocks - 3 Breakout Stocks to Buy for Huge Upside

Source: Shutterstock

Bulls pulled the S&P 500 back from the brink this week. Optimism ahead of the Federal Reserve meeting gave buyers cover to defend the 50-day moving average and stave off a bigger breakdown. Today we’re looking at the best breakout stocks to buy in the wake of the rally.

The two-day run greeting traders at the start of the week powered prices in the S&P 500 back to the upper end of its recent trading range. We’re sandwiched between the 50-day moving average below and the 20-day moving average above. Hopefully, today’s Fed announcement will be the catalyst needed to create an upside breakout.

But some stocks don’t even need the Fed’s help. They’re flying just fine and either already blasted through resistance or are on the cusp. Here are my top three breakout stocks to buy right now:

  • DraftKings (NASDAQ:DKNG)
  • Taiwan Semiconductor (NYSE:TSM)
  • Pinterest (NYSE:PINS)

After laying out why they’re so compelling, I’ll build out an options trade with big profit potential.

Breakout Stocks With Big Upside: DraftKings (DKNG)

DraftKings (DKNG) stock chart showing bullish breakout

Source: The thinkorswim® platform from TD Ameritrade

The big news for DraftKings this week was the sports-betting company announcing a partnership with ESPN. Wall Street cheered the deal and bid DKNG stock to a new record. This morning we’re seeing powerful follow through with the stock up another 9%.

From a charting perspective, the surge created a great breakout to complete a four-month basing pattern. This is a very compelling bullish pattern. As technicians like to say, “the longer the base, the higher in space.” When prices finally emerge from a multi-month consolidation zone, it marks a great buying opportunity.

If you feel like you missed the move, you can always wait for a pullback to provide a better entry. The implied volatility is high enough, however, that you can sell puts and get paid for your willingness to acquire DKNG stock at lower prices.

The Trade: Sell the Oct $45 put for around $2.15.

If DKNG stock sits above $45 at expiration, you’ll pocket the max profit of $215 per contract.

Taiwan Semiconductor (TSM)

Taiwan Semiconductor (TSM) stock chart showing bullish breakout

Source: The thinkorswim® platform from TD Ameritrade

Bulls swarmed Taiwan Semiconductor on Tuesday, jamming the tech stock up 6.6% to a new record. The run wasn’t some small-fry led affair. It had institutional backing. Volume swelled to over 21 million shares marking the most-active trading session since the stock exploded in July.

The pop in participation gives me confidence that the breakout sticks and prices continue pushing higher. Ultimately $100 is the eventual target. A few days of backing-and-filling wouldn’t be a bad thing, but as long as we remain above the 20-day moving average near $80, I like bullish trades.

If you’re willing to bet on buyers, but want a higher probability of profit, then consider bull put spreads. Implied volatility is high enough to make the premiums compelling.

The Trade: Sell the Oct $80/$75 bull put for around $1.25.

If TSM stock remains above $80 by expiration, you’ll capture the max gain of $125 per spread.

Pinterest (PINS)

Pinterest (PINS) stock chart showing imminent breakout

Source: The thinkorswim® platform from TD Ameritrade

Pinterest rounds out this list of breakout stocks to buy with a pattern on the cusp of completion. Ever since the earnings report on July 31 delivered an epic up-gap, prices have been consolidating in a bullish fashion. Its impressive that PINS could pole vault as high as it did and maintain the gains.

It hasn’t given back an inch of the rally. Instead, buyers have kept prices aloft to allow longer-term moving averages like the 50-day to play catch-up. With overbought pressures now fully eased and the stock knocking on the door of resistance, an upside breakout appears imminent.

The cheaper price tag and low implied volatility suggest bull call diagonals are a smart trade here.

The Trade: Buy the Nov $35 call and sell the Oct $41 call for $4.70.

If PINS stock makes a push for $41, you will score a profit between $100 and $200 per contract.

On the date of publication, Tyler Craig held a LONG position in TSM.

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