Smith & Wesson Holding recently has been in the news amid mass shootings and the U.S. Supreme Court's decision to decline to review a Highland Park, Ill., law that banned residents from owning semiautomatic rifles fed by high-capacity magazines.
Smith & Wesson Holding (SWHC) is one of the few listed makers of such rifles, which makes the stock a knee-jerk favorite for the gun-ban fear trade.
Barron's explains that options provide a way to trade the company's shares in such a volatile atmosphere.
A resurgence of gun fears is speculative, so investors should consider using options rather than buying stock to trade the theme. Options cost less than equities, and define the risk should the trade prove erroneous.
"With Smith & Wesson’s stock around $23, aggressive investors can buy the gun maker’s January 22 call that expires in January 2017 for about $4.75. The January 22 call that expires in 2018 costs about $5.90," author Steven Sears explains in Barron's.
"Investors primarily interested in trading gun-ban fears can stick to the 2017 expiration. The recent shootings in San Bernardino, Calif., all but guarantee that gun laws will be a significant part of the presidential election cycle and an issue for local- and state-government deliberations. The California terrorists used semiautomatic rifles with high-capacity magazines. Similar rifles were used in the Paris attacks," he wrote.
"The 2018 expiration monetizes the buy-and-ban trade, and covers an event that could significantly benefit Smith & Wesson."
To be sure, there has been a public backlash against gun makers amid the recent outbreak of mass shootings.
New York City Mayor Bill de Blasio has urged the city's pension funds to divest their holdings in stocks of gun makers after the mass shooting in San Bernardino, California,
Reuters reported
Two of the funds in the city's $155 billion pension system dropped their holdings in gun manufacturers such as Smith & Wesson Holding and Sturm Ruger & Co. Inc. after the Sandy Hook school shooting in 2012.
"I call on all government pension funds in New York City and across the country to divest immediately from funds that include assault weapon manufacturers," de Blasio said in a statement.
De Blasio also appealed to private investors to dump gun stocks and funds that invest in them.
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