In yesterday’s piece, I started an examination of aerospace companies with coverage of The Boeing Company. I recommended buying the BA Aug 2015 150.000 call (BA150821C00150000) at an asking price of $6.50 as soon as the market opened yesterday. Interestingly, the contract soared with gains yesterday to confirm my bullish thesis with a 31.53% gain to close at $8.55. You can go through that piece again and jump into BA call options while they are still hot.
Today, we will take aerospace stocks a notch higher as we examine the options of a company in the defense sector. Lockheed Martin Corporation (NYSE:LMT) is set to release its first quarter (Q1 2015) earnings today by 11:00AM EST and I believe we can take strategic positions in order to profit when the stock moves after earnings.
If you are not conversant with Lockheed Martin, the company is a global security and aerospace company with a market capitalization of $61.56B. The company is principally engaged in the research, design, development, manufacture, integration and sustainment of advanced technology systems, products and services. The Company operates in five business segments based on the nature of the products and services offered, such as Aeronautics, Information Systems & Global Solutions, Missiles and Fire Control, Mission Systems and Training and Space Systems.
Why We Are Looking at Lockheed Martin Today
The shares of Lockheed Martin gained 1.02% to close at $196.80 yesterday, just 5.21% away from its 52-week high of $207.06. The main reason I am attracted to Lockheed Martin is the impressive 22.81% gains that the stock has recorded in the last one year despite all the apprehension about reduced defense spending. In fact, the stock has gained an impressive 131.6% over the course of last five years and this lends credibility to the company’s capacity to grow.
The chart above shows how the shares of Lockheed Martin have traded in the last one year. I have annotated the chart to show the strong possibility that the stock has to soar after its earnings release today.
The stock started in a rectangle channel marked by a $156 support and a $161 resistance from May 2014 through July 2014 (shaded part, bottom left). After impressive Q2 2014 earnings, the stock began a rally marked in an uptrend with rising support and resistance levels (red and green arrows). The stock is now in another rectangle channel (shaded part, top right) marked with a $195 support and a $204 resistance point.
How to Trade LMT Options
If Lockheed Martin provides impressive first quarter results, we can expect the stock to break out above that $204 resistance to establish another support around $200. Lockheed Martin has consistently surprised positively with an average surprise of 6.56% in the last four quarters. More so, the company has beaten estimates in 18 out of the last 20 quarters.
Lockheed Martin’s profit was below expectations in the last quarter but the company has provided a conservative guidance that suggests that the company will find it relatively easy to beat expectations and raise the guidance for the next quarter. The consensus analyst estimate is for earnings of $2.48 down from $2.87 in the same quarter last year.
If Lockheed Martin beats the consensus estimate, investors will mostly be looking at the company’s overseas sales, new deals and the level of momentum in lasers (that’s what Pentagon plans to spend money on) and you can trust the share to rise if all these keys fall into place. I recommend buying LMT calls as soon as you lay hands on the earnings report and the aforementioned keys fall into place. You’ll do well to purchase the LMT Jun 2015 200.000 call (LMT150619C00200000) at an asking price of $3.60.
— Daily Option Alerts