Smith & Wesson Holding Corp (NASDAQ:SWHC) has been in the crosshairs of bears since last week’s surprise Republican trifecta. Now, however, and for bullish investors, the technical slaughter suggests it’s time to stockpile a bullish position in SWHC stock.
It was a surprise to this market strategist. No, I’m not talking about President-Elect Donald Trump. Personally, after the Brexit I was inclined to accept The Donald had a legitimate shot at becoming our commander in chief.
No, what I’m referring to is how SWHC stock got shot down following the election.
Last month I wrote an article aimed at higher prices in Smith & Wesson shares using a bull call spread. While the vertical did go on to be fully in-the-money and profitable on paper in front of last Tuesday’s result, the siege and full Republican control of Congress was a totally unexpected game changer.
The logic behind the plunge of nearly 25% by Friday’s close in shares of SWHC stock is that under a Republican Congress, Smith & Wesson is free to sell guns without having to defend itself from the likes of anti-second-amendment folks associated with a Hillary Clinton presidency. That’s the good news.
The bad news is bearing this freedom of sorts in mind, any further panicked stockpiling of munitions by some gun owners has been put on indefinite hold. In turn, shares of Smith & Wesson are being systematically recalibrated for weaker growth under a Trump presidency.
In our view though, investors are overlooking that Smith & Wesson has been around since before the Civil War. Invariably and over those 170-plus years, the company has dealt with similar episodes of panic stockpiling, followed by the mentality “everyone that’s bought, has bought” paranoia favored over the past week.
So while I agree revenue growth should be anticipated to decline near-term, trust me — there will be a future call-to-arms for Smith & Wesson’s wares undoubtedly triggered by a still-undetermined catalyst. And in the here and now, with SWHC stock left for dead, it’s time for bulls to lock and load with a shorter-term play.
SWHC Stock Daily Chart
Stocks correct and technical corrections happen for all sorts of reasons that sound good in the heat of battle. But then, and quite typically, it’s on to new and more optimistic narratives that yield higher stock prices. Personally, that’s what I see happening in Smith & Wesson.
Currently SWHC stock is trading at a nice discount to its recent all-time highs following a fairly ordinary correction of 33%. Now and with Monday’s bullish double-bottom confirmation and shares oversold short-term, it’s time for a bullish call spread that positions for some upside, but keeps traders protected from potential, future bearish and less friendly technical fire on the price chart.
SWHC Stock Bullish Long Call Spread
Reviewing the SWHC options board, the Dec $23/$25 bull call spread is attractive.
Priced for 85 cents with SWHC stock at $23, this bullish position will require a move of around 3.7% on an expiration basis to break even. An upside move of 8.7%, or above the sold $25 call strike, would yield a return of 135% or $1.15 per vertical.
The spread price of 85 cents compares favorably to an outright purchase of the $23 call which trades for $1.65. That’s nice to consider, but remember all spreads are compromises.
Traders need to recognize the lesser cost and reduction in Greeks risks are countered by slower and capped profits in the event SWHC shoots higher when compared to an outright call. Bottom line though, in weighing the pros and cons, this SWHC vertical is an effective way for bulls to position for their own assault on those nasty bears.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
