Bet on the Upside in Lockheed Martin Stock Before It’s Too Late

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LMT stock - Bet on the Upside in Lockheed Martin Stock Before It’s Too Late

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So far, 2018 has been a headline trading year for stocks. Since the February correction started, equities have been battling a slew of global tariff war headlines. It has been hard for investors to concentrate on company fundamentals when they have to worry about combative tweets and retaliatory state statements.

The high profile industrials like Caterpillar (NYSE:CAT) are hit especially hard and Lockheed Martin (NYSE:LMT) is caught up among them. But therein lies the opportunity. LMT stock is a defense stock, so if anything, it should benefit from conflicts.

But for now, fundamentals are subservient to headlines. Tomorrow they report earnings so this is a chance for management to make a statement to Wall Street that it is firing on all cylinders.

Technically, I like the setup for a rally. LMT stock is setting higher lows off $290-per-share. They are testing a resistance level and if they can breach it, there should be a retest of $330 or higher.

Fundamentally, Lockheed Martin stock is not screaming cheap. But with a 22 price-to-earnings ratio, it’s not bloated either. So the downside from here is limited and this is important to my trade today.

There is upside opportunity in LMT stock coming into its earnings. And with a good base below and a head of steam at hand, I favor the rally potential versus the potential fade on earnings this week.

Furthermore, the long-term trend for LMT stock is very constructive and there is no apparent reason for this to change. Management continues to execute on plans. And as long as President Trump remains committed to a strong U.S. companies like LMT, it should continue to do well.

The Trade: Sell the LMT JAN 2019 $260 put. This is a bullish trade for which I collect $3-per-contract. By selling this naked put, I am committing to buying LMT stock at my sold strike if the price falls below it. So, I better be willing and able to own Lockheed Martin stock at $260 and I would accrue losses below $257-per-share.

Ahead of earnings, this trade has an 85% chance of success. Worst case scenario, I would own LMT stock at more than a 20% discount from current levels.

Selling naked puts is not suitable to all risk tolerances. Those who want to limit the risk can use a bull put spread instead.

The Alternate Trade: Sell the LMT JAN 2019 $270/$260 credit put spread. This is also a bullish trade, which potentially yields 10% on money risked. I do have to recognize that the spread is slightly closer to the current price, thereby reducing the chances of success. But over a period of months, this difference could be negligible.

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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 as @racernic on twitter and stocktwits.


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Article printed from InvestorPlace Media, https://investorplace.com/2018/07/bet-on-the-upside-in-lockheed-martin-lmt-stock/.

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