Axon Enterprise broke out to a multimonth high Tuesday with a strong bullish candle.
Traders looking for a more conservative way to play Axon stock via options could use a bull put spread.
As a reminder, a bull put spread is a defined risk strategy, so you always know the worst-case scenario in advance. This type of trade will profit if Axon stock trades sideways or higher. It can even profit if it trades slightly lower, offering flexibility in uncertain markets.
The strategy involves simultaneously selling a higher strike put option while buying a lower strike put option in the same expiration cycle.
In exchange for selling the bull put spread, the trader receives the option premium. It has risk equal to the difference in strike prices, less the premium received.
For investors seeking income generation with defined risk parameters, this bull put spread presents an appealing opportunity in the current market environment.
Axon Stock Trade Setup
Traders that think Axon will stay above 800 for the next few weeks could sell a Sept. 19 bull put spread between 800 and 810 for around $2.25 a share. Under a 100-share contract, selling this spread would generate roughly $225 in premium with a maximum risk of $775.
If the spread expires worthless that would be a 29% return in slightly more than one month. Further, that presumes Axon stock is above 810 at expiration. The maximum loss would occur if Axon stock closes below 800 on Sept. 19. That's right around the low of its recent earnings gap up. In that scenario, the premium seller loses $775 on the trade.
The breakeven point for the trade is 807.75, which is calculated as 810 less the 2.25 option premium per contract. That's also 8% below the price this morning around 877.
It's best to set a stop loss if the stock breaks back below 830, which is right around the area of resistance it just cleared. Alternatively, you could use the option value as a stop. An increase from 2.25 to 5.50 could be a place to set an exit. Sticking to these stop loss levels helps avoid large losses if the stock drops back down.
One thing to watch out for is the bid-ask spread on this ticker. It is quite wide, and option volume is lower than on other stocks. Our most recent bull put spread on Shopify stock looks like it will expire for a full profit.
Top-Level Earnings Score
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. Investor's Business Daily also gives it a best-possible Earnings Per Share Rating of 99, a Composite Rating of 96 and a Relative Strength Rating of 94.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a masters in applied finance and investment. He specializes in income trading using options, and is conservative in his style. He also believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ.
