Options Traders Bid Up Ammo Inc (POWW) But Can The Rally Last?

Easily one of the top performers in the market on Monday was ammunition manufacturer Ammo Inc (POWW). It’s not too difficult to figure out why. Following the shocking assassination attempt of former President Donald Trump, POWW stock skyrocketed, likely on anticipation that tighter gun control measures would restrict access to firearms and related products.

Another catalyst could be the anticipation of social unrest. As you know, the political discourse has grown incredibly divisive in recent years. The current election cycle has devolved into pejorative attacks, suggesting a fissure in November, irrespective of the end result. As such, the market may believe that concerned citizens will arm themselves, leading to the boost in POWW stock.

While this framework sounds awfully cynical, it’s important to note that several firearm-related enterprises also shot higher on Monday. Notably, Smith & Wesson Brands (SWBI) gained over 11% of equity value. Gun-manufacturing competitor Sturm Ruger (RGR) didn’t see quite as strong of a sentiment boost. Nevertheless, it too popped up more than 5%.

Let’s not forget Sportsman’s Warehouse (SPWH), an outdoor-activities retailer that sells firearms and ammunition. After its much-anticipated merger with Great Outdoors Group failed to materialize, Sportsman’s has been on the backfoot, struggling for traction financially. However, SPWH stock enjoyed a strong 7% performance yesterday.

Not surprisingly, traders in the derivatives market have eyeballed POWW stock. Not only has the firearms industry become suddenly relevant, Ammo Inc shares are “cheap,” trading hands for less than $2. So, should investors buy into the speculative opportunity? Below are some factors to consider.

POWW Stock Rings Up Significant Unusual Options Volume

Given the robust performance of POWW stock, it was only logical that the underlying enterprise would be represented in Barchart’s screener for unusual stock options volume. This data interface allows investors to see what ideas the smart money is focusing on, possibly suggesting future price movements.

In Ammo’s case, total volume hit 4,357 contracts against an open interest reading of 20,327 contracts. Monday’s volume relative to the trailing one-month average metric represented a swing higher of 759.37%. Breaking down the statistics, call volume reached 4,251 contracts versus only 106 puts.

Subsequently, the put/call volume ratio came out to a lowly 0.02. Mathematically, this implies that more traders are acquiring calls than puts, which seemingly has a bullish implication. However, it’s important to realize that for every option purchased, that same option must be sold. Therefore, how the large players have positioned themselves is just as important to understand as the put/call ratio.

To better decipher the sentiment for POWW stock, Barchart’s options flow screener – which filters exclusively for big block trades likely placed by institutional investors – shows that net trade sentiment stands at $16,500. That doesn’t sound like a whole lot but remember that POWW can be had for two bucks. Therefore, participation is quite low.

Looking at the various transactions, on the optimistic side of the fence, traders are generally betting that within a few months, POWW stock will hit $2.50. The expiration dates vary from this Friday to January of next year. Still, the consensus appears to be that Ammo can pop roughly 31% from Monday’s close.

But is that realistic? I have doubts.

From a technical perspective, POWW stock appears to have charted a candlestick pattern reminiscent of what’s known as a “shooting star.” In particular, the long upper wick or shadow suggests that while the bulls managed to push the price substantially higher during the day, POWW stock eventually closed at a much lower point (relative to the intraday high).

One interpretation is that POWW encountered significant resistance around the $2 level. Also, it’s worth noting that both its 50-day moving average ($2.17) and 200 DMA ($2.30) will likely impose obstacles to future upside attempts. Finally, it’s interesting that the intraday high ($2.05) was noticeably shy of the 50 DMA.

Fundamentals Present More Challenges

Another set of headwinds to consider are the fundamental obstacles. Primarily, Trump enjoys tremendous support from his core voting base. After the assassination attempt, one must figure that he has the sympathies of independent voters. Therefore, “The Donald” and the Republicans appear to be cruising toward victory.

Naturally, if Republicans win, they probably won’t implement gun control measures. That would easily alienate a central part of the conservative base.

Second, Americans acquired a record number of guns during the COVID-19 crisis. According to The Hill, retailers sold nearly 60 million firearms between 2020 and 2022. That’s a massive number of weapons and it’s doubtful that another surge will materialize over a single event.

With all due respect, most people are not important or influential enough to warrant realistic concerns about assassinations. Therefore, the technicals appear to be confirming what the fundamentals are suggesting: POWW stock got a nice pop but it might not last.