3 Defense Stocks For The 4th

Hey Traders,

Happy Fourth of July! Well, technically the fifth of July, but the market is closed, so it feels like a holiday to me!

And of course, I never want to miss an opportunity to give a sincere “thank you” to those that have sacrificed for the many, many freedoms we enjoy today. This country would undoubtedly not be what it is today if it weren’t for those who were brave enough to make it so.

On that note, in the spirit of the Fourth of July, and what it symbolizes, we’re going to take a look at a “patriotic” sector …

Here’s how I’d play these three defense stocks.

General Dynamics

Aerospace and defense company General Dynamics (Ticker: GD) had a strong end to the week, after a Friday announcement it had procured a $395.5 million grant from the Department of Homeland Security to provide data center support services.

Although the shares had a nice intraday rally, they gave away most of their midday “hurrah!” to finish only slightly higher for the day.

Of course, this isn’t GD’s first rodeo – or first government contract. Just a few months ago the aerospace/marine systems/combat systems/tech company received $696 million in contracts from the U.S. Air Force, and its overall revenue for the year is expected to exceed $40 billion.

Chart courtesy StockCharts

GD has had an overall solid year so far, and there’s high expectations headed into earnings early next month. Plus, the shares went ex-dividend on Thursday, which may explain a bit of the lower buying volume even after news of the new contract broke on Friday (if you purchase a stock that’s in its ex-dividend phase, the seller of the stock receives the next dividend, not the buyer).

What I’m liking about GD, however, are its options.

The defense name’s 30-day at-the-money implied volatility (ATM IV) is sitting in the lower end of its annual range (in the 12th percentile), which means options are cheap right now.

And looking at the books, I believe it. Near-term at- or near-the-money calls do seem to be relatively low priced. Looking ahead to pre-earnings volatility, or the likelihood of an upbeat earnings call, could make cheap calls a nice way to play this defense stock.

Raytheon Technologies

Raytheon Technologies (Ticker: RTX) is another name that also enjoyed that “new contract” boost last week, after being awarded a $2 billion contract by the U.S. Air Force to develop a Long Range Standoff (LRSO) weapon system on Thursday, a $171 million Navy contract on Friday, and a $328 million contract from the Naval Air Systems Command on Wednesday.

Oh, and RTX’s subsidiary, Blue Canyon, announced the successful launch of 88 satellites aboard a Space X transport flight.

All in all, not a bad back half of the week for the defense conglomerate.

Perhaps unsurprisingly, RTX has climbed steadily on the charts in 2021, notching a new all-time high just last month.

Chart courtesy StockCharts

In the pits, RTX’s 30-day ATM IV is also in the low end of its annual range, with 92% of the readings from the last year being higher.

This means that — like GD — RTX’s options are relatively cheap right now. 

However, RTX has not confirmed its next earnings date, though estimates say it will likely take place later this month. Should you choose to go the “cheap call” route on this name, I’d keep an ear to the ground for an earnings call announcement, and keep the timeframe somewhat short.

Northrop Grumman

Northrop Grumman (Ticker: NOC) recently notched a new all-time high, but the defense technology company has spent the last several weeks side-winding.

Chart courtesy StockCharts

NOC is slated to report earnings July 27, and like the other names on this list, its 30-day ATM IV is in the low end of its annual range (the 8th percentile). (Gee, it’s almost like there’s low volatility out there …)

However, I don’t find calls to be as favorably priced on this name, given that I think there is limited upside in the near-term. 

Instead, I would consider selling puts, as these are relatively high-dollar contracts, and I don’t expect to see a whole lot of movement to the downside, either. (These defense stocks tend to be pretty steady in general).

I’m also finding out-of-the-money options to be more expensive compared to at-the-money, as people are using options to hedge against a market downturn. With the VIX hitting post-pandemic low after post-pandemic low, though, I’m thinking we have a while before anything dramatic plays out (knock on wood!). This gives me some good trading opportunities on stocks that are unlikely to make wild swings in either direction.

Defense stocks may not always be the most exciting, but that doesn’t mean there’s no way to profit them.

Enjoy the market holiday.

Your Only Option,

Mark Sebastian

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