Skip to main content

Morning Update

On Friday, March 1st the sequester is scheduled to take effect and will remove about $45 billion from Pentagon programs. Despite this Lockheed Martin saw heavy call option trading on Friday with 5 calls trading for every put. The biggest trade of the day was the purchase of 5000 April 92.5 calls for $0.65 with the stock at 88.50. This is a bullish bet that the stock, which is down 4.5% year to date, will rally at least 5% over the next month and a half.

Right now there are two risks facing this stock: the sequester, and the Pentagon’s grounding of the F-35 Joint Strike Fighter. Despite the looming deadline for the sequester the defense and aerospace sectors are holding strong near 52-week highs. Although Lockheed is off of its lows it is well off its 52-week high, demonstrating relative weakness to its peers. Lockheed has said that they expect sales to be flat as a result of government budget cuts. To make up for this the company is looking to cut costs and increase sales abroad. The other issue facing Lockheed Martin is the grounding of the F-35 Joint Strike Fighter. The fighter is currently 7 years behind schedule and well over budget. The aircraft is still in its testing phase and groundings like this are not uncommon. The reason was a cracked turbine blade and Lockheed says they expect to have a solution by the end of the week. If there is a quick fix then the program will be back up and running in no time, but the problem has potential foreign purchasers becoming more and more skeptical. For instance, Australia is expected to order 100 F-35s, a $13.21 billion deal, but Peter Goon, a consultant at the Air Power thinktank, told Australia’s parliament that “The Joint Strike Fighter is a failed program with no prospect of recovery,” If Lockheed continues to see problems and delays in the F-35 program they become more likely to lose the international customers they will need to grow down the road.

Right now the stock’s downside is somewhat limited by its 5% dividend yield, and the sequester could be factored into the stock’s price already. I would not own the stock here because of the headline risk right now. But buying calls could be low risk, potentially high reward trade if there is good news about the F-35 and the sequester this week.

Comments

Popular posts from this blog

Is the KCJ Foreshadowing a 2008 Repeat?

The CBOE Correlation Index (KCJ) is close to the lowest level we have seen since it was first listed in 2007. The KCJ measures the implied movement of the S&P 500 components options, compared to the implied movement of the S&P 500 index options. Simply put, the higher the number, the more likely all stocks are going to move together. Conversely, a low number will be characterized by sector rotation, and flat markets; one sector moves higher, another moves lower.  (Source: Access Hollywood) Correlation, for lack of a better term, is correlated with volatility. Not surprisingly, 30-day S&P 500 historical volatility is near the low level of 6.5%. Currently at 33.5, KCJ is sitting close to rock bottom, lower than where it was in 2007, (but not lower than where Lindsay Lohan was in 2007).  So far this year, the market has been able to grind higher, characterized by leadership in FANG(Facebook Apple/Amazon, Netflix, Google) and sector rotation. A...

Heading into Summer

With the dog days of summer almost upon us, it's time to start thinking about option strategies. Most of the time, the summer is when markets are calm. However, this may not necessarily be the case for options. Playing both sides, options give you an edge as you decide where you think the market may be. On Options Action, the panel had many interesting topics on their plates. As volatility continues the shrink, the fear in the market is slowly deteriorating. However, this may not mean a jump is coming. There is still a lot of uncertainty out there. Putting this all in prospective click below to hear all the newest option strategies. http://www.cnbc.com/id/15840232?video=1131628744&play=1 http://www.cnbc.com/id/15840232?video=1131630253&play=1 http://www.cnbc.com/id/15840232?video=1131628723&play=1 http://www.cnbc.com/id/15840232?video=1131628711&play=1