Getting Long the Gun Trade with Options

It’s no secret that the recent sorrowing news of Newtown has taken a toll on the gun stocks of RGR (Sturm, Ruger & Co.) and SWHC (Smith & Wesson Holding Co.).  The stock that I want to focus on here is RGR namely for its previous momentum and potential for short covering if it were to make an upside move.  Right now it is a story stock and is not trading on fundamentals or technicals but mainly on “I want out now”.

RGR is down -32.46% off its recently attained 52 week high.  Since it reached its 52 week high it has sold off.  Normally I do not like to take part in story stocks.  But I think there may be an opportunity here in RGR looking at the long-term chart, potential for a short squeeze, and the ability to take advantage of any upside move with some buffer.  RGR is still a fundamentally sound stock (although I do not trade off that ) but I also like the fact that 48.38% of the float is short with 16.53 days to cover.  Below is a technical and fundamental data screen shot courtesy of FINVIZ:

Below is a weekly chart:

The trade that I am looking at is an options trade that is not risk-defined.  The trade is a bull risk reversal.  I like to use these as stock substitutes at levels of where I believe I get a good purchase price on the stock but it also takes advantage of an upside move if that level is not reached by option expiration.

The trade that I like is the Jan13 35.5/45.5 Bull Risk Reversal.  With this I am selling the Jan 35.5 put and buying the Jan 45.5 call for a 0.05 credit.  The important thing to remember with these is that you are willing to be long stock.  With this trade I am:

  • willing to be long RGR if it closes below 35.50 on January expiration (Jan 18)
  • will receive a $5 credit to my account if it closes between 35.50 and 45.50 on January expiration
  • have the potential for unlimited upside

Below is the Risk Profile of the trade:

Right now thinkorswim is showing a buying power effect of 452.51, so this is the amount that I would need to put up in margin in order to put this trade on, keeping in mind that this will fluctuate with price.  One could also do an outright put sale with the same Jan 35.5 put for a credit of 0.95 (0.90 more than the risk reversal).  The reason why I don’t like this trade is that it limits my upside by the sale of the put while still taking on the same downside risk of assigned stock.  So with the call kicker in the bull risk reversal, I am taking more advantage of an upside move if it were to occur.  Hopefully this helps in some way and shows how one can use options to take advantage of stock at a discount or take advantage of an upside move in between the time of the trade and options expiration.

When former momentum names get beaten down like RGR has, one of my favorite things to watch in the options market is for put sales in size.  When you see big blocks of put sales that is hinting to me that institutions are willing to get long that name at that price or take advantage of stalling/upside action.  For example if I saw a 1,000 block of options trade at 35.5 in RGR, that would give me more confidence in this trade as it is telling me that an institution is willing to be long 100,000 (1,000 x 100) shares of RGR at a cost basis of 34.55 (35.50 – 0.95).

2 Responses to “Getting Long the Gun Trade with Options”

  1. nice post

    • Thanks Fly, also thinking further selling would trigger the 6,12 Tech/Hyb OS signals which would be a contributing factor for a bounce given previous stats.

Comments are closed.
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Getting Long the Gun Trade with Options

It’s no secret that the recent sorrowing news of Newtown has taken a toll on the gun stocks of RGR (Sturm, Ruger & Co.) and SWHC (Smith & Wesson Holding Co.).  The stock that I want to focus on here is RGR namely for its previous momentum and potential for short covering if it were to make an upside move.  Right now it is a story stock and is not trading on fundamentals or technicals but mainly on “I want out now”.

RGR is down -32.46% off its recently attained 52 week high.  Since it reached its 52 week high it has sold off.  Normally I do not like to take part in story stocks.  But I think there may be an opportunity here in RGR looking at the long-term chart, potential for a short squeeze, and the ability to take advantage of any upside move with some buffer.  RGR is still a fundamentally sound stock (although I do not trade off that ) but I also like the fact that 48.38% of the float is short with 16.53 days to cover.  Below is a technical and fundamental data screen shot courtesy of FINVIZ:

Below is a weekly chart:

The trade that I am looking at is an options trade that is not risk-defined.  The trade is a bull risk reversal.  I like to use these as stock substitutes at levels of where I believe I get a good purchase price on the stock but it also takes advantage of an upside move if that level is not reached by option expiration.

The trade that I like is the Jan13 35.5/45.5 Bull Risk Reversal.  With this I am selling the Jan 35.5 put and buying the Jan 45.5 call for a 0.05 credit.  The important thing to remember with these is that you are willing to be long stock.  With this trade I am:

  • willing to be long RGR if it closes below 35.50 on January expiration (Jan 18)
  • will receive a $5 credit to my account if it closes between 35.50 and 45.50 on January expiration
  • have the potential for unlimited upside

Below is the Risk Profile of the trade:

Right now thinkorswim is showing a buying power effect of 452.51, so this is the amount that I would need to put up in margin in order to put this trade on, keeping in mind that this will fluctuate with price.  One could also do an outright put sale with the same Jan 35.5 put for a credit of 0.95 (0.90 more than the risk reversal).  The reason why I don’t like this trade is that it limits my upside by the sale of the put while still taking on the same downside risk of assigned stock.  So with the call kicker in the bull risk reversal, I am taking more advantage of an upside move if it were to occur.  Hopefully this helps in some way and shows how one can use options to take advantage of stock at a discount or take advantage of an upside move in between the time of the trade and options expiration.

When former momentum names get beaten down like RGR has, one of my favorite things to watch in the options market is for put sales in size.  When you see big blocks of put sales that is hinting to me that institutions are willing to get long that name at that price or take advantage of stalling/upside action.  For example if I saw a 1,000 block of options trade at 35.5 in RGR, that would give me more confidence in this trade as it is telling me that an institution is willing to be long 100,000 (1,000 x 100) shares of RGR at a cost basis of 34.55 (35.50 – 0.95).

2 Responses to “Getting Long the Gun Trade with Options”

  1. nice post

    • Thanks Fly, also thinking further selling would trigger the 6,12 Tech/Hyb OS signals which would be a contributing factor for a bounce given previous stats.

Comments are closed.