Double Dipping: Combine 2 Barchart Screeners for Risk-Controlled Options Trading

Technology and weapons product specialist Axon Enterprise (AXON) — best known for its Taser device and policy body camera — enjoyed a big return on Thursday, with AXON stock gaining over 6%. This was no fluke, either. Since the beginning of the year, shares have swung up almost 53%.

What caused the latest bump in AXON stock? As Barchart content partner The Motley Fool mentioned, JMP analyst Trevor Walsh raised his price target on the security by $55 to $430. In addition, the expert reiterated his market outperform rating, which is the equivalent of a “Buy” assessment. With AXON closing at $384.51 on Thursday, there may still be some room for decent capital gains.

In addition, Axon delivered strong results for its fiscal second quarter, with total sales rising 35%. Moreover, its artificial-intelligence-based Draft One software system saw revenue jump by 70% — twice that of the corporate growth rate.

In other words, as TMF pointed out, AXON stock is essentially an AI play. Thanks to the blistering popularity of machine intelligence, the weapons product developer — which is especially popular among law enforcement agencies — it’s possible that the company could continue marching higher.

Nevertheless, there are concerns to be aware of. Perhaps most notably, AXON stock isn’t cheap by any stretch of the imagination. Right now, shares trade hands at 171.12X trailing earnings. Its price-to-sales ratio screams at a nosebleed level of 17.37. Fundamentally, violent crime is going down, which may translate to less relevance for law enforcement.

At the same time, police forces across the nation are encountering challenges in hiring and retaining officers. And when stacked against analyst targets for earnings and revenue, the valuation of AXON stock — while still hot — is at least more palatable relative to historical multiples.

Bottom line: there may be some growth opportunities here but with some key reservations. So, here’s what investors should do.

Double Dipping on Barchart Screeners

As mentioned in my prior articles, Barchart offers a range of compelling tools and resources. One of my personal favorites is the J-Hook Pattern. Essentially, it’s a sinusoidal chart pattern that indicates the possibility of a subsequent breakout move. That seems to make much sense for AXON stock.

Yes, shares have already moved up strongly this year. However, as analysts have mentioned, there could still be more growth left in this trade before AXON stock taps out. Of course, an element of pensiveness exists when a security has enjoyed as much upside momentum as AXON has. Nobody wants to be left holding the bag.

Here’s a compelling idea to address this challenge. As stated earlier, there’s still good reason to be bullish on AXON stock. While its valuation is scorching hot, the underlying sales growth is impressive. Further, the fundamentals of police recruitment challenges means that agencies require as much protective gear for their officers as possible. Overall, Axon stands on solid ground.

With that being said, investors may be interested in a vertical options spread strategy. For securities that have an underlying derivatives chain, Barchart provides a laundry list of attractive trading ideas, broken down based on risk-reward profiles.

For those who are moderately bullish, a bull call spread may be appropriate. This strategy involves two calls with the same expiration date: first, the trader buys a call and second, the trader sells a call but at a higher strike price.

Basically, what this vertical stack accomplishes is that it reduces the cost of the overall bullish position. Buying a straight call option — especially for a security with a price tag of almost $400 — can get very expensive. However, through selling a call option, the trader receives income from said sale. This reduces the net premium paid for the bullish position.

The upside, again, is that this position is discounted because of the sold call. However, the downside is that the total return is limited because of that sold call. Nevertheless, when faced with an already-hot stock, going with a bull call spread may be a much more prudent decision for your money.

A Balanced Trade for the Cautious Investor

Now, let’s suppose that you like Axon and want to scalp some profits from it. Simultaneously, you’re worried that the stock could plunge, making a straight call option purchase ultimately worthless. Here’s a balanced idea you may consider for calls expiring on Oct. 18, 2024:

• Buy the $380 call at an ask of $16.70 per contract (or $1,670 after multiplying 100 shares).
• Sell the $390 call at a bid of $10.40.
• The breakeven price lands at $386.30.
• Maximum profit is $3.70 per contract.
• Maximum loss is $6.30.

For this trade to be profitable, you’re looking for AXON stock to at least be above the breakeven price of $386.30. Obviously, you’re hoping that the security reaches $390 or above. At that point, you will receive the maximum profit of $3.70 per contract (or $370).

It’s possible, of course, to make more than $370 profit if you buy an aggressive out-the-money call and the market moves in your favor. For example, the $420 call expiring on Oct. 18 is priced at an ask of $3 per contract.

But what’s really the likelihood that AXON stock will move over 9% over the next month? With the bull call spread, the security only needs to move 1.42% up from Thursday’s close to be fully profitable. That’s arguably a much more palatable framework than taking a purely naked bet on AXON generating robust upside.

In other words, you can trade AXON or you can trade it smartly. Barchart provides the tools to allow you to do the latter.