A Conservative Strategy to Benefit from Bullish Axon Stock

Axon Enterprise's Strong Performance and Strategic Options Play

Axon Enterprise has recently made a significant move, reaching a multimonth high on Tuesday. This strong bullish candle has caught the attention of many traders looking to capitalize on the stock's momentum. For those seeking a more conservative approach, options trading offers an alternative strategy that can provide both income and defined risk parameters.

One such strategy is the bull put spread, which is particularly appealing for investors who want to generate income while limiting potential losses. A bull put spread involves selling a higher strike put option and buying a lower strike put option in the same expiration cycle. This strategy allows traders to profit if the stock trades sideways or higher, and it can even benefit from a slight decline in the stock price, making it a flexible choice in uncertain market conditions.

The key advantage of a bull put spread is its defined risk profile. Traders know exactly what the worst-case scenario is before entering the trade. In exchange for selling the spread, the trader receives the option premium, which serves as a source of income. The maximum risk is equal to the difference in strike prices minus the premium received. This structure makes it an attractive option for those who are cautious about their investment risks.

Axon Stock Trade Setup

For traders who believe that Axon will remain above 800 over the next few weeks, a Sept. 19 bull put spread between 800 and 810 could be a viable opportunity. Selling this spread would generate roughly $225 in premium per 100-share contract, with a maximum risk of $775. If the spread expires worthless, this could result in a 29% return in slightly more than one month, assuming the stock closes above 810 at expiration.

However, if the stock closes below 800 on Sept. 19, which is near the low of its recent earnings gap up, the trader would face a loss of $775. The breakeven point for this trade is 807.75, calculated as 810 minus the $2.25 option premium per contract. This is also approximately 8% below the current price of around 877.

To manage risk effectively, it’s advisable to set a stop-loss level if the stock drops below 830, which is near the area of resistance it has just cleared. Alternatively, traders can use the option value as a stop. An increase from $2.25 to $5.50 could signal a good exit point. Adhering to these stop-loss levels helps prevent large losses if the stock declines further.

It's important to monitor the bid-ask spread on this ticker, as it tends to be quite wide. Additionally, option volume for Axon is lower compared to other stocks, which may affect liquidity and execution.

Earnings and Market Position

Axon develops and sells conducted electrical weapons and technology solutions for law enforcement, military, and personal defense markets through its Taser weapons and Axon segments. According to IBD Stock Checkup, Axon stock ranks third in its group. The company also holds a best-possible Earnings Per Share Rating of 99, a Composite Rating of 96, and a Relative Strength Rating of 94.

These ratings highlight Axon's strong performance and position in the market. However, it's essential to remember that options trading carries significant risks, and investors can lose 100% of their investment. This article is intended for educational purposes only and should not be considered a trade recommendation. Always conduct thorough research and consult with a financial advisor before making any investment decisions.

Gavin McMaster, a graduate with a master's in applied finance and investment, specializes in income trading using options. He emphasizes the importance of patience and careful selection of trade setups. You can follow him on X/Twitter at @OptiontradinIQ.

Additional Resources

If you're interested in exploring other strategies, there are several related articles that may be helpful:

• How To Put Marvell Technology Stock On An Iron Condor's Wings
• Uber Stock: How A Cash-Secured Put Can Limit Costs For Investors
• How To Invest In JPMorgan Stock For One-Sixth Of The Price
• TSMC Stock: How A 'Target Strike Butterfly' Could Boost Gains

These resources offer insights into various options strategies and can help you make informed decisions in the ever-changing stock market.