Call Options Or Put Options On Sturm Ruger (RGR)?

| April 25, 2012 | 0 Comments

RGR OptionsSturm Ruger (RGR) is a leading manufacturer of firearms in the US.

They produce hundreds of thousands of firearms each year for hunting, target shooting, collecting, self-defense, law enforcement, and government agencies.

And business is booming…

Last year, the number of National Instant Criminal Background Check Systems (NICS) increased 14%.  These background checks are required before purchasing firearms in the US.

Obviously, the more NICS background checks that retailers perform, the more guns they’re selling.  So it’s a good leading indicator of firearms demand.

Not surprisingly, RGR reported sales increased 20% over the previous year as the number of NICS background checks soared.  And the stock was off to the races…

Sturm Ruger Chart

Is now the time to buy call options on RGR as it takes aim at record highs?  Or should you buy puts on RGR as it misses the mark?

The bulls make a convincing argument…

As I said before, the number of NICS background checks performed gives us a preview of gun demand.  Last month, they soared 20% year-over-year to nearly 1.2 million.

Analysts are expecting profits to surge 62% to 68 cents per share when they report earnings on May 1st.

And for good reason, gun enthusiasts are afraid that President Obama will enact stricter gun laws if he’s re-elected to a second term.

The political uncertainty is forcing gun buyers to take action now.  And with the Presidential election just months away, demand should remain strong as gun enthusiasts buy guns before it’s too late.

Simply put, demand for firearms is soaring and RGR is the beneficiary.

But the bears have a compelling case as well… 

RGR has simply flown too high too fast.

The stock has more than doubled from $25 in October to $54 today.  And it’s up an eye-popping 260% since January of 2011.

There’s simply not enough demand to fuel further gains in the stock.

Remember, political uncertainty is pushing demand forward.  What will happen after the election?  More than likely we’ll see a steep drop off in demand.

As you know, the stock market is forward looking.  At some point, the stock price will begin pricing in post-election demand that isn’t nearly as bullish as the run-up to the election.

What’s more, RGR is priced to perfection.  In other words, if RGR doesn’t meet analysts’ high expectations, we could see a quick correction in the stock.

The bottom line is RGR could have a hard time living up to investors’ lofty expectations.

If you think firearms’ demand will continue to soar, take a look at buying the RGR May 2012 $60 Calls for around $0.70.

If you think firearms’ demand has peaked, take a look at buying the RGR May 2012 $50 Puts for around $1.00.

Good Investing,

Corey Williams

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Category: Call Or Put Options?

About the Author ()

A former banking executive, Corey Williams is the Chief Options Strategist and co-editor of our well-known daily newsletter, Options Trading Research. Corey’s extensive experience with options goes all the way back to his days in corporate finance. It was this decade in banking where Corey discovered the most important skill an options trader can have– the ability to analyze a company or sector to determine its likely future direction. And now he’s brought this background, experience and love of options to Options Trading Research, the unique daily e-letter devoted exclusively to helping individual investors profit from the very lucrative options market.