Call Options Or Put Options On Lockheed Martin (LMT)?

| June 6, 2012 | 0 Comments

LMT OptionsLockheed Martin (LMT) is a global security and aerospace company.  They’re primarily a defense contractor for the US government.  They also make satellites and do some work with Information Technology.  But 61% of LMT’s sales are tied to defense.

And they’re good at what they do…

Lockheed makes some of the most amazing hi-tech equipment used by armed forces today.  They make aircraft, ground vehicles, missiles & guided weapons, missile defense, naval systems, and unmanned aircraft… just to name a few.

LMT currently trades for $80.82 per share.  The stock is up 28% from the 52-week low of $66.36.  But it’s recently fallen 11% from the 52-week high of $92.24.

Is this an opportunity to buy call options on LMT as it bounces back?   Or is this the time to buy put options on LMT as the selloff accelerates?

The bulls make a convincing argument…

LMT’s new fighter, the F-35 Lightning II, represents the pinnacle of 50 years of fighter development.  The joint strike fighter is an awesome combination of versatility and power.

Simply put, the F-35 Lightning II will dominate the battlefield for years to come.

The fighter has been developed with partners from nine countries around the world.  Now, LMT gets to make and sell them to the defense departments in all of these countries.

The ability to sell F-35s to multiple governments around the world gives LMT a huge market for these planes.   As LMT ramps up production, sales of the F-35 will fuel strong sales and earnings growth over the next few years.

What’s more, the company has a huge stock repurchase program that will help fuel earnings per share growth.  That’s a powerful combination capable of sending the shares soaring into the mid $90s.

But the bears have a compelling case as well… 

There’s no doubt about the positive impact the F-35 will have on the company.  But LMT still faces many potential pitfalls.

First off, Europe is still in the midst of a sovereign debt crisis.  And the remedy being prescribed is austerity.  That means less government spending.  If the defense budgets get the ax, sales of the F-35 could fall short of expectations in the short term.

What’s more, LMT’s overall sales are expected to be flat this year.  The expected gains in Aerospace are being offset by lower sales of Space Systems and IT.

The only reason EPS are expected to increase is because of their massive share repurchase program.

Put simply, LMT’s path to earnings growth will require nearly perfect execution.  And if governments cut defense spending more than expected, LMT could easily see earnings fall short of expectations.  That uncertainty will likely send the stock tumbling toward the 52-week low.

If you think the bulls are right, take a look at buying the LMT September 2012 $85 Call for around $2.00. 

If you think the bears are right, take a look at buying the LMT September 2012 $77.50 Put for around $2.45.

Good Investing,

Corey Williams

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Category: Call Or Put Options?

About the Author ()

A former banking executive, Corey Williams is the Chief Options Strategist and co-editor of our well-known daily newsletter, Options Trading Research. Corey’s extensive experience with options goes all the way back to his days in corporate finance. It was this decade in banking where Corey discovered the most important skill an options trader can have– the ability to analyze a company or sector to determine its likely future direction. And now he’s brought this background, experience and love of options to Options Trading Research, the unique daily e-letter devoted exclusively to helping individual investors profit from the very lucrative options market.