Smith & Wesson (SWHC - option chain) shares are rising today ahead of tonight's scheduled speech by President Obama outlining his plan to increase US troop levels in Afghanistan. Since SWHC is a military contractor, investors anticipate that the added troops could lead to more orders from the military. If you think that the stock won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on SWHC.SWHC opened this morning at $5.14. So far today the stock has hit a low of $5.05 and a high of $5.42. As of 12:00, SWHC is trading at $5.38 up 44 cents (8.9%). The chart for SWHC looks neutral and S&P gives SWHC a neutral 3 STARS (out of 5) hold ranking.
For a bullish hedged play on this stock, I would consider a June covered call at the $5 level. A covered call is an options position that combines the purchase of stock with the sale of call options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 21.8% return in seven months as long as SWHC is above $5 at June expiration. Smith & Wesson would have to fall by more than 6% before we would start to lose money. Learn more about this type of trade here.
SWHC has not been below $4, which is the break-even point on this position since March and has shown support around $4.50 recently.
Brent Archer is an options analyst and writer at Investors Observer.
DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent neither owns nor controls positions in SWHC.
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Reader Comments (Page 1 of 1)
12-01-2009 @ 6:26PM
phurl1020 said...
SWHC share price increasing has everything to do with Thursday's pending earnings announcement and nothing to do with Obama's Afghjanistan troop announcement. SWHC has been rising since November's option expiration. Do you really think that the fresh troops going to Afghanistan do not already have weapons? At the end of SWHC's Quarter 1 earnings announcement in September; the SWHC CEO predicted another record setting quarter for Quarter 2.