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Short-Term Traders Could Find 92% Gains in This Growth Stock

Short-Term Traders Could Find 92% Gains in This Growth Stock

Trade summary: A bull call spread in Axon Enterprise, Inc. (Nasdaq: AAXN) using the June $90 call option which can be bought for about $4.20 and the June $95 call could be sold for about $2.49. This trade would cost $1.71 to open, or $171 since each contract covers 100 shares of stock.

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  • In this trade, the maximum loss would be equal to the amount spent to open the trade, or $1.71. The maximum gain is $329 per contract. That is a potential gain of about 92% based on the amount risked in the trade.

    Now, let’s look at the details.

    AAXN is a global leader in connected public safety technologies.

    Many investors will know the company by its former name, TASER International, Inc.

    Axon continues to make tasers and conducted electrical weapons (CEWs) for use by law enforcement, military, corrections and private security personnel, and by private individuals for personal defense. It is also engaged in development of connected wearable on-officer cameras.

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  • The company’s hardware products include Axon Body 2, Axon Flex, Axon Fleet, Axon Interview, Axon Signal and Axon Dock. Its Axon software and mobile technologies include Evidence.com, Evidence.com for Prosecutors, Evidence Sync, Axon Capture, Axon View, Axon Five, Axon Convert and Axon Detect.

    In the first quarter, according to PR Newswire, “revenue grew 27% year over year to $147 million , with strength driven by our Software & Sensors product segment, which grew 41% year over year due to demand for Axon Cloud software offerings and Axon Body 3, our latest generation camera that features LTE-connectivity and location-based services.”

    The stock was up on the news.

    AAXN daily chart

    This gain could make the stock appealing to short term traders following momentum strategies. Longer term investors could be interested in the details of the earnings announcement.

    “International revenue grew 38% in the quarter to a record $30 million.

    GAAP EPS was $0.07 and Non-GAAP EPS was $0.40.

    Axon Cloud revenue grew 42% year over year to $39 million, driven by public safety adoption of our high-value, software-heavy bundles.

    Axon Cloud gross margin of 75% includes some low-to-no margin professional services that support new installations for SaaS customers. The software-only revenue in this segment, which includes cloud storage and compute costs, has consistently carried a gross margin above 80%.

    Sensors & other revenue grew 41% year over year due to strong demand and shipments of our Axon Body 3 camera.”

    The growth and high margins of the company’s camera related businesses could make the stock appealing to long term investors since this could deliver strong, steady and sustainable growth in earnings.”

    The stock is near all time highs and could deliver substantial growth to long term investors.

    AAXN weekly chart

    A Specific Trade for AAXN

    For AAXN, the June 19 options allow a trader to gain exposure to the stock. This trade will be open for about six weeks and allows for traders to turn over capital quickly, potentially compounding gains several times a year.

    A June 19 $90 call option can be bought for about $4.20 and the June 19 $95 call could be sold for about $2.49. This trade would cost $1.71 to open, or $171 since each contract covers 100 shares of stock.

    The amount paid to enter the trade is the largest possible loss on the trade. This is generally true whenever a trader is creating a debit to enter an options trade. “Creating a debit” means there is a cost to enter the trade. You could create a debit by simply buying puts or calls to open a directional trade.

    In this trade, the maximum loss would be equal to the amount spent to open the trade, or $171.

    The maximum gain on the trade is equal to the difference in exercise prices less the amount of the premium paid to open the trade.

    For this trade in AAXN, the maximum gain is $3.29 ($95- $90= $5; 5- $1.71 = $3.29). This represents $329 per contract since each contract covers 100 shares.

    Most brokers will require minimum trading capital equal to the risk on the trade, or $171 to open this trade.

    That is a potential gain of about 92% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.

    A Trade for Short Term Bulls

    As with the ownership of any stock, buying AAXN could require a significant amount of capital and exposes the investor to standard risks of owning a stock.

    To reduce the risks of a trade, an investor could purchase a call option. This allows them to benefit from upside moves in the stock while limiting risk to the amount paid for the options. However, buying a call option can also require a significant amount of capital and includes the risk of a 100% loss.

    Whenever an option is bought, the maximum risk is always equal to 100% of the amount of spent to purchase the option. Since options cost significantly less than a stock, the risk in dollar terms will usually be relatively small to own an option.

    To further limit the risks of the trade, an investor could use a bull call spread. This strategy consists of buying one call option and selling another at a higher strike price to help pay for the cost of buying the first call. The spread strategy always reduces the risk of an options trade.

    This strategy is designed to profit from a gain in the underlying stock’s price but  the benefit of avoiding the large up-front capital outlay and downside risk of outright stock ownership. The potential risks and rewards of this strategy are summarized in the chart below.

    bull call spread

    Source: The Options Industry Council

    Both the potential profit and loss for the bull call spread are limited. The maximum loss is equal to the net premium paid when the trade is opened. The maximum profit is limited to the difference between the strike prices, less the debit paid to put on the position.

    This strategy could be especially appealing with high priced stocks where the share price and options premiums are often a significant commitment of capital for smaller investors.

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