We can use that volatility to collect short term income by opening short option trades like naked put writes or, as I am recommending today, this put credit spread on Lockheed Martin Corporation (NYSE:LMT).
One effect of the rapid shifts in the market is higher implied volatility, which is the market’s forecast of how any security is likely to move.
Higher implied volatility means stocks are more likely to make big moves, and right now, investors are convinced that stocks will make big moves to the downside. That means selling far out-of-the-money put options is even more profitable.
The Military Hasn’t Stopped Spending
LMT is an aerospace and security company, and it has contracts with militaries around the world.
One of the things that makes LMT such an attractive stock in this market is its relationship to the U.S. military, which makes up a huge portion of government spending. The company was recently awarded a contract to provide component kits for upgrading American owned C-130J aircraft.
The $16 million contract may not seem like much, but at a time when good news is hard to come by, it is important to highlight successes.
The market is set to open higher this morning. Oil prices have recovered slightly, and President Trump has floated the possibility of a payroll tax cut.
And looking at the daily chart of the LMT’s performance, you can see that its support levels are intact after yesterday’s drop.
Far Out-of-the-Money Options are Key
LMT dropped to support at around the $350 level yesterday, and it looks ready to bounce higher this morning. In the past, I’ve mentioned that support levels aren’t as meaningful when dealing with a “black swan” like the spread of COVID-19, so let’s instead turn to the trade I’m recommending.
Daily Chart of Lockheed Martin Corporation (LMT) — Chart Source: TradingView
In this put credit spread, I am setting the upper strike price at $275, which is just under 22% below yesterday’s closing price.
A drop to $275 per share would represent a 37% fall from its early February high, so I don’t think we’re likely to see LMT trade that low.
With a put credit spread, you can limit your risk by buying a long option with a lower strike price, which is exactly what I’m recommending this morning.
Using a spread order, sell to open the LMT March 20th $275 put and buy to open the LMT March 20th $210 put for a net credit of about $1.00.
Note: Be sure you are opening the monthly LMT options that expire on Friday, March 20, 2020.
This is a high-risk trade, so take a small position.
About Put Credit Spreads
A put credit spread is a bullish position that involves writing (selling to open) an option and simultaneously purchasing (buying to open) an option at a different strike price in the same underlying security. The position, or leg, of the spread trade that you sell gives you a cash credit to your trading account. The option you buy limits your risk and lowers your margin requirement for the trade.
This is a bullish trade in which you want the underlying share price to stay above the upper strike price of the spread. In this case, we want LMT to stay above $275 through the March 20 expiration.
InvestorPlace advisor Ken Trester also brings you Power Options Weekly, which delivers 5 new options trades and his latest trading advice to you each Friday. Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990.