Last December, Lockheed Martin Corporation (NYSE:LMT) stock tumbled on headlines that Trump wanted to lower margins on the F-35. I took the dip opportunity to sell downside risk and got paid to go long LMT stock for free. The trade was an easy win yielding over $2 per contract in pure profits.
Fundamentally, nothing has changed. LMT got the message from President Trump that costs will have to be kept in line. So I would imagine that the effects of this will be spread over the next year or two and therefore be hardly noticeable.
Click to Enlarge Technically, the long-term ascending trend in Lockheed Martin shares remains intact. So with little competition and huge barriers to entry, I can safely assume that the long-term outlook of the LMT stock price should remain rosy. I do have to recognize that markets in general are perceived to be extended. So this could present periods of malaise if markets correct.
The Trade: Sell the LMT Sept $200 put. This is a bullish trade for which I collect $2.50 per contract. By selling this naked put, I am committing to buying LMT stock at my sold strike if price falls below it. So I better be willing and able to own Lockheed Martin stock at $200. Anything lower than $197.50 per share would accrue losses.
As of today, this trade has a 90% theoretical chance of success. So on the positive side, if I were to be put the stock at $200 per share, I would be buying LMT stock at more than a 20% discount from current levels.
Selling naked puts is not suitable to all risk tolerances. Therefore, I can modify the trade to be a better fit with limited risk.
The Alternate Trade: Sell the LMT Sept $210/$205 credit put spread. This is also a bullish trade for which I collect 55 cents per contract. If successful, this trade yields 12% on money risked. I do have to recognize that the spread is slightly closer to current price, thereby reducing the chances of success. But over a period of months, this difference could be negligible.
I am not required to keep my trades open. I can close the trade at any time for partial gains or losses.
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.
