What is the best way to stop a runaway horse? Bet on it.
Two months ago, Fool contributor Jeff Hwang noted more than half of the public shares of non-lethal weapons manufacturer Taser
At the same time, this reporter was saying, "But with the company looking for 100% sales and profit growth in the future, Taser is hardly highway robbery at current levels," and, "Contrary to popular perception, Taser is not a one-trick pony." Oh, to have bet on that pony!
Since then, the stock is up another 100% and the shorts have dropped to a still staggering 40%.
Yesterday's 17.5% gain came on news of a 2-for-1 stock split. In February (yes, two months ago) the stock rocketed 20% on news of a 3-for-1 split. The fundamentals are basically unchanged. Yet, two events that do nothing more than divide the company's ownership into more shares have caused massive explosions in price.
At this point, present owners of Taser might want to consider writing covered call options. Options essentially allow you to "rent" your stock at a predetermined price and time. If you think a stock has risen too far, too fast, would you be willing to take $2,200 (22%) today for every 100 shares you own by agreeing to sell the stock at today's price five months from now? By selling a call option, you would be doing just that.
Why consider this strategy? The stock is selling for well over 60 times 2005 earnings. That's rich. If it keeps going up and your stock is "called," you miss out on that appreciation. On the other hand, another gigantic increase, although possible, may not seem likely in the next five months. This way, if the stock stays put or sells off modestly, you keep what you got from selling the calls.
Moreover, because Taser is attracting a lot of attention, its option prices are inflated to reflect that optimism, which could benefit writers of covered calls. And let's be clear, selling calls if you don't own the stock (a.k.a. writing naked calls) is dangerous under any circumstances and clearly not Foolish! Think of anyone who did so since I chimed in two months ago -- they are in dire straights, indeed.
For perspective, consider that Motley Fool Hidden Gems recommendation Fresh Del Monte
Taser is the darling of Wall Street (or at least the retail investor). Taser is the darling of U.S. police forces. Shareholders still have options (pun intended), even if they do not want to cash out.
Fool contributor W.D. Crotty does not own stock in any of the companies mentioned. W.D. is stunned and dumbfounded every time Taser hits a new high.
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