Bulls Target Surging Gun Stocks As Obama Weighs Executive Action

With executive action looming, Sturm, Ruger & Company (NYSE:RGR) and Smith & Wesson Holding Corp (NASDAQ:SWHC) are booming

by Josh Selway

Published on Jan 4, 2016 at 2:36 PM

Gun stocks Sturm, Ruger & Company (NYSE:RGR) and Smith & Wesson Holding Corp (NASDAQ:SWHC) are shooting higher today, bucking the broad-market downturn. Traders are responding to reports that President Barack Obama is expected announce new gun control measures this week. With this in mind, let's take a closer look at RGR and SWHC. 

RGR is up 3.9% today at $61.94, bringing its 12-month lead to 77.5%. These gains have brought option bulls to the table, with call volume running at four times the expected intraday pace. The most popular option is the January 2016 65-strike call, which it appears some traders may be buying to open. If this is the case, the speculators are betting on the stock to topple $65 before front-month options expire at the close on Friday, Jan. 15. 

Looking back, however, option traders have shown a propensity for betting against the stock. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), for example, RGR boasts a 50-day put/call volume ratio of 3.10, which is higher than 82% of all other marks from the previous 12 months. In short, put buying has been more popular than normal, relative to call buying. 

What's more, short sellers have taken an interest in Sturm, Ruger & Company (NYSE:RGR). The gun stock's short-interest ratio stands at 4.50, signaling that it'd take almost a week for bears to buy back their positions, at normal daily volumes. From a contrarian perspective, RGR could have some room to run, if bears hit the exits.

Meanwhile, SWHC has added 6.4% to hit $23.40, but that's nothing new. The stock has more than doubled in the past 12 months, while the firearms manufacturer presented a better-than-expected earnings report just last month. In fact, the shares hit an all-time best of $24.06 on Dec. 15. 

In the options pits, intraday call volume is pretty normal today, with traders seemingly buying to open the February 25 strike in hopes of extended gains -- and higher highs -- from SWHC. This is more of the same from the stock's speculators, though. During the past 10 sessions at the ISE, CBOE, and PHLX, SWHC has racked up a call/put volume ratio of 12.41, outranking 73% of its peers from the past year. 

Moreover, among the stock's front three-months' series of options, call open interest more than triples put open interest. This is according to SWHC's Schaeffer's put/call open interest ratio (SOIR) of 0.32. What's more, this reading sits below 62% of all others going back one year, signaling an unusual call-skew among short-term option traders. 

Most analysts have taken a bullish stance, too. Of the nine brokerage firms covering Smith & Wesson Holding Corp (NASDAQ:SWHC), six say it's at least a "buy." 

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