Shares of defense contractor Lockheed Martin (LMT) are up about 30 percent over the past year as traders have moved into defensive stocks. One trader sees a pullback in shares in the coming weeks.
That’s based on the March $410 puts. With 64 days until expiration, 5,029 contracts traded compared to a prior open interest of 160, for a 31-fold rise in volume on the trade. The buyer of the puts paid $4.90 to make the bearish bet.
Shares recently traded for about $460, so the stock would need to drop about $50, or just over 10 percent, for the option to move in-the-money. Shares have come slightly down from a 52-week high just shy of $500 in recent sessions.
The stock’s move higher was largely driven by sentiment last year, as revenues rose by just 4 percent. The company relies on government contracts, and some spending bills passed in 2022 give the company some certainty over the next few months.
Action to take: Shares are priced at the higher end of their historical range at 22 times forward earnings. While Lockheed yields 2.5 percent right now, patient investors who buy on a drop can likely get an even higher starting yield.
For traders, a short-term pullback appears to have started. The March puts can likely deliver mid-to-high double-digit returns in the coming weeks, depending on how strong shares pull back.
Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any of the companies mentioned in this article.