From the morning post:
Putin responded to Trump's nuclear tweet (yes, apparently, this is how we conduct diplomacy now) by saying: "We need to strengthen the strategic nuclear forces, for that we should develop missiles capable of penetrating any current and prospective missile defense systems." He also called for the balanced development of all branches of the armed forces, precision weapons, modern means of communication and inspection as well as electronic warfare systems. There was, of course, much celebrating among Global defense contractors and Putin himself will make Billions through his control of Russian contractors.
Because of their work on nuclear fusion, Lockheed Martin (LMT) is our favorite US defense contractor and they've been down recently as Trump tweeted out his displeasure with F35 cost overruns but, overall, we think it's a nice opportunity to go long LTM:
- Sell 5 LMT 2019 $200 puts for $13 ($6,500)
- Buy 5 LMT 2019 $220 calls for $45 ($22,500)
- Sell 5 LMT 2019 $260 calls for $23 ($11,500)
That puts you into the $20,000 spread that's 80% in the money for net $4,500 so the upside potential, if LMT just manages to move up $10 in two years, then it's a profit of $15,500 (344%) and ordinary margin on the short puts is about $10,000 but those puts are a nice 20% discount to the current price – we're playing conservative because we do expect a market pullback.
We also like Raytheon (RTN), who get paid almost $2M every time the US fires a Tomahawk missile (and we do that a lot!). So, to bet on the escalating cold war (and the proxy wars we love to fight), we like:
- Sell 5 RTN 2019 $120 puts for $8.50 ($4,200)
- Buy 5 RTN 2019 $120 calls for $29 ($14,500)
- Sell 5 RTN 2019 $145 calls for $15 ($7,500)
In this case net $2,800 in cash buys us a $12,500 spread so the upside potential at $145 (where we are now) is $9,700 (346%).
