EOT Trade Alert – June 25, 2009

Corey Williams | June 25, 2009

June 25, 2009

Trade Alert:

Buy RGR August 2009 12.50 Puts at $2.10 or better (RGRTV)

Company Background:

Sturm Ruger (RGR) designs, manufactures, and sells firearms. They’re a one trick pony. 96% of their revenue comes from gun sales in the US.

Short-Term Catalyst:

The Obama effect is over for gun stocks.

That’s right, when Barack Obama was elected president, he caused gun sales to shoot through the roof. Well, it wasn’t just him. It was all of his Democrat buddies who took office down the street in Congress too.

The fear was liberal law makers would soon reinstate a ban on assault rifles.

Gun enthusiasts and card carrying members of NRA rushed out to fill their gun cabinets before Congress could act. As a result, gun manufacturers posted amazing earnings the last two quarters.

But it’s all about to come undone.

The gun industries leading indicator is showing gun demand in slumping back to pre-election levels. You see, every time someone buys an assault rifle or hand gun, the retailer runs a background check through the FBI. And the number of background checks the FBI ran last month is down about 30% from the previous month.

No background check equals no sale.

These poor sales will show up in the quarterly earnings expected the week of July 20.

Let’s take a position now with the expectation revenue will fall, pushing the stock price down. I selected “in the money” options because they look undervalued to me.

Trade Details:

Option Ticker Symbol:	RGRTV
Underlying Stock Symbol:	RGR
Current Bid-Ask Price:	$1.60 – $1.95
Option “Buy Up To” Price:	$2.10
Break-Even On Stock At Expiration:	$10.40
Maximum Risk Per Contract:	$210

Exit Strategy:

RGR is trading at $11.76 per share. Resistance levels will be at $13 and again at $14. Remember, we want this stock to move lower. Support levels will be at $10 and $8. Conservative investors should look to exit at the first support or resistance level. Aggressive investors may want to hold for a bigger move.

Chart: