Friday, November 24th, 2017

Should You Buy Calls or Puts on Gun Maker Stocks?

 

After the worst mass shooting in American history last night in Las Vegas the shares of gun maker and ammunition makers went up. Should you buy calls or puts on gun maker stocks today? CNN Money writes that gun maker stocks are up.

Shares of Sturm Ruger (RGR) were up 4%, while American Outdoor Brands (AOBC), the company formerly known as Smith & Wesson, gained more than 3%. A company named Olin (OLN), which owns the Winchester brand of ammunition, rose 6% to an all-time high.

The stocks have tended to rally in the immediate aftermath of mass killings, which sadly have become more routine.

The Pulse nightclub in Orlando in June 2016. San Bernardino in December 2015. The Aurora, Colorado movie theater and Sandy Hook Elementary School in Newtown, Conn. in 2012.

Investors had bet that these massacres would lead to tougher gun control laws, especially because of tough talk from President Obama.

The stricter laws never materialized. Instead, gun sales climbed during the Obama administration’s two terms as gun aficionados bought more firearms just in case rules changed at a national level or in individual states controlled by Democrats.

Will it be different this time and will the Republican controlled congress and White House move to enact laws banning the sale of military issue assault weapons to civilians? It would appear that sales of weapons and ammunition are driven by fear that the government will enact laws to restrict access. If that is the case should you be buying calls or puts today in the aftermath of the Las Vegas massacre?

Call and Put Options

The point of buying call or put options is to stake out a position in advance of market movement.

A call contract gives the buyer the option to purchase the underlying equity which he will do if the equity price moves in the direction anticipated. A call contract confers an obligation on the seller (writer) of the call option to sell the underlying equity if the buyer executes the contract. Similarly a put contract gives the buyer the option to sell the underlying equity which he will do if the equity price moves in the direction anticipated. A put contract confers an obligation on the seller (writer) of the put option to buy the underlying equity if the buyer executes the contract.

If history is a guide no new legislation will be passed but people will rush to buy guns and ammo just in case. Then the gun market will return to normal except that people who may have been thinking of buying a gun will have just made a purchase. Thus the secondary effect of the shooting will be to depress the gun market after a brief spike. If you want to make money in the medium term the best route is probably to watch while gun maker prices rise and then buy puts in anticipation of the market cooling off in the coming weeks. If you want to buy calls the time is now but the time may be very short to see any further upward market action.

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