After much mockery pre-election, there is no doubt that markets now respect the potential and clout of President-elect Donald Trump. Today, one simple tweet from Trump about F-35 fighter jet pricing and traders caused Wall Street to sell Lockheed Martin Corporation (NYSE:LMT) off by 5%.
While I am not one to condone catching falling knives, LMT stock is a quality pick that’s going on sale today. This could last a few days, so I’m not in a rush. Instead, I’m looking for levels against which I can sell bullish risk in the options market.
Fundamentally, a tweet shouldn’t completely obliterate a company of LMT’s size and importance. Trump is a businessman, and this is more likely his way of opening a negotiation dialog. Eventually they will find middle of the road terms to appease all parties involved.
Click to Enlarge Technically, I like the long-term trend in LMT stock. Even with today’s drop, Lockheed is still inside a three-year ascending channel. If I decide to go long on today’s negative headline, I have to be realistic about the potential of downside scenarios, so, I need to find levels I deem relatively safe to eventually hold.
If the ascending channel breaks, we are likely to test lower prices. For that, I see a resting zone of $235 per share, then another around $225 and a third around $220. Luckily, the options markets provide me with hundreds of trade setups to establish a long position without placing risk near today’s iffy levels.
The Trade: Sell the LMT Jun 2017 $200 put. This is a bullish trade for which I collect $3.20 per contract. I only sell naked puts if I am willing and able to own the stock at the strike sold even if Lockheed Martin falls below it. To win, I need LMT stock to stay above my sold put through June expiration.
Statistically, this trade has a 90% theoretical chance of success and a price buffer of 20% from current levels. I can close the trade at any time for partial gains or losses.
Since this would be a naked put, management of the risk of loss is of the essence. If LMT continues to fall, I can manage the risk with shorter-dated puts or spreads.
Selling naked puts is not suitable to all risk tolerances or account sizes. I can modify the trade to better suit those who prefer limited risk.
The Alternate Trade: Sell the LMT June $210/$205 credit put spread. This is also a bullish trade for which I collect 65 cents per contract. This alternate trade has a slightly smaller buffer from current price, but in return, it has a finite maximum risk — if Lockheed Martin falls to zero, my losses would stop accruing at $205 per share.
If successful, this trade would yield over 10% on money risked.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.
