Trading Options On Smith & Wesson: Still A Force To Be Reckoned With

| About: American Outdoor (AOBC)

If anyone has ever handled a Smith & Wesson firearm you know that this is a force to reckoned with. Whether you like guns or not, guns have stood the test of time and can be seen as an alternative investment. Sometimes you have to wonder with all the technological revolutions over time that demand for firearms would be subdued. Even in a challenging economy firearms still remain an attractive investment for the long term since firearms don't generally depreciate. Weather you own a gun or not, there are other ways to make money in the gun industry and that is by investing.

Smith & Wesson Holding Company (SWHC) is the largest manufacturer of handguns in the United States. At first glance one may think that Smith & Wesson just sells and manufactures handguns. But, over time Smith & Wesson has evolved into a security solutions company. Some of these security solutions include license plate readers, guard booths, mobile barriers and high security fencing (just to name a few). If anyone ever wanted to build the ultimate compound, Smith & Wesson Holding Company can help you achieve that.

On March 8, 2012 Smith & Wesson Holding Company delivered a bullish bazooka when they reported third quarter earnings of 0.07 cents per share with a consensus range of 0.04 to 0.06. Smith & Wesson also raised full year guidance due to strong demand and sales of firearms. Smith & Wesson's 10-Q paints a bullish picture of what more consumer discretionary income can do for firearm sales. In Smith & Wesson's 10-Q total net sales for January 31, 2012 were 98,125 compared to the same period last year of 79,238. Hand gun products saw a sales increase of 8.2 million and order backlogs are higher. For more investment information on Smith & Wesson Holding Company click here.

What Smith & Wesson did on March 9, 2012 (up over 20%) is what most stocks try to aim for the entire year. With Smith & Wesson having such a surge higher, investors may ask themselves how they should play Smith & Wesson if there is further upside. While there is nothing wrong with taking a profit after such a large move, there could still be more upside to continue and here is an option trade on Smith & Wesson Holding Company

Idea #1 Buy June 16 $5 call

In this trade I would want to wait for a pullback and look at buying a deep in the money call options. Unless you believe this run up in the shares are a fluke and the stock is going to head down another 20% then you should be safe at this level.

Cost of 1 June 16 2012 $5 call = 2.10 (2.10 x 100 = $210)

Break even = $5 + $2.10 = $7.10

Days till expiration = 96

Idea #2 June 16 2012 6/8 vertical call spread

In this trade if you believe there is some more upside, then having a risk defined trade may also work for you. An investors risk is defined since the call that you're buying is offset by the call you are selling.

Cost of June 16 $6 call = 1.30 (1.30 x 100 = $130)

Cost of June 16 $8 call = 0.30 (0.30 x 100 = $30)

$130 - $30= $100 per spread

Break even = $6 + $1 = $7 (7.00 - current stock price = 0.06 cent movement needed to break even).

Max profit = difference between strikes 8 - 6 = 2 (2 - 1 cost of spread = 1 or $100)

Days till expiration = 96

While you don't need much of a move to get to your break even point, I would also want to wait and see if a pullback comes with such a large movement Smith & Wesson has had. Currently, the prospects are looking up on Smith & Wesson. But, I would rather wait and see if any of the air comes out of this stock before making a bullish move.

On April 13-15th there will be National Rifle Association 141st annual meeting and exhibits held at the America's center in Saint Louis, Mo. Smith & Wesson will be there in attendance for anyone who wants to check out their products and many other companies in the security and firearm industry. Thank you for reading and Good Luck.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in SWHC over the next 72 hours.