In option trading, there are times that a trader may be more aggressive in his or her trading and there are times that a trader may put on a more defensive position. Here is a more defensive trade idea on a company that makes defense-orientated products and equipment.
Lockheed Martin Corp. (LMT): Put Credit Spread
The trade: Sell the September 110/115 Put Credit Spread (selling the September 115 put and buying the September 110 put) for 0.45 or better.
The strategy: The maximum potential profit for this trade is 45 cents if LMT is trading above $115 at September expiration. The maximum loss is $4.55 ($5 – 45 cents) if LMT is trading below $110 at September expiration. Breakeven is $114.55 at expiration based on a credit of $0.45.
Click to Enlarge The rationale: Lockheed Martin announced earnings just a couple of weeks ago and did fairly well. Even though sales fell 4% in the second quarter compared to last year, they were able to increase their earnings per share partly due to an aggressive stock buyback program and beating analysts on their sales. Since then, the company has been able to score a number of new contracts including a deal with the Pentagon for more F-35 fighter jets.
To see why this trade idea has potential, a trader needs to look at a five-year chart of LMT. The stock just recently broke through a five-year pivot high (resistance) and it is now trading at its all-time high. . Selling a put spread will still allow a trader to profit in case it does just that. There is also a base area of support right around $118 in case it does try to move lower again. A defensive play for a defensive-orientated company might be worth looking at.
No positions held at the time of writing. If you are interested in a free trial of my LIVE options trading room visit: http://markettaker.com/options_insider_trial/