Lockheed Martin

O

oldnemesis

http://finance.yahoo.com/news/defense-budget-settled-buy-defense-194207267.html

http://www.msn.com/en-us/money/stockdetails/financials/fi-126.1.LMT.NYS

http://news.investors.com/110615-77...ber-bid.htm?ven=yahoocp&src=aurlled&ven=yahoo

http://finance.yahoo.com/q/ks?s=LMT+Key+Statistics

http://finance.yahoo.com/q/is?s=LMT

http://stockcharts.com/h-sc/ui?s=LMT

Trade:
With LMT at 216.63
Jun 185/180 bull put spread for a net credit of $45
Yield = 45/455 = 9.9% in 224 days or 16% annualized
Prob = 88%
Expectation = .88(45) - .08(455) - .04(227) = 39.6 - 36.4 - 9.08 = -6

Price............... Profit / Loss........... ROM %
150.00................. (455.00)............ -90.10%
170.00................. (455.00)............ -90.10%
180.00................. (455.00)............ -90.10%
184.55...................... 0.00................ 0.00%
185.00..................... 45.00............... 9.90%
190.00..................... 45.00............... 9.90%
215.00..................... 45.00............... 9.90%
250.00..................... 45.00............... 9.90%
270.00..................... 45.00............... 9.90%
 
My historical data puts the probability of success of this trade 93%, but implied vol on LMT is at a 7-year low. Curious why you're choosing this underlier as you're not really collecting that much premium to make it that attractive. Similar strategies on other stocks in strong uptrends with only slightly higher vol would result in similar historical probabilities of success with a decent amount more premium collected.
 
enjoytrading said:
My historical data puts the probability of success of this trade 93%, but implied vol on LMT is at a 7-year low. Curious why you're choosing this underlier as you're not really collecting that much premium to make it that attractive. Similar strategies on other stocks in strong uptrends with only slightly higher vol would result in similar historical probabilities of success with a decent amount more premium collected.
More...

Can you give an example??
 
Sure. I haven't done much research on these other than looking at the put spread screen and pricing / historical success rates in my app. I kept the same ~85% moneyness for your short strike. Obviously these likely have different risk factors, just saying that I think there are other opportunities where you can likely collect more for similar downside risks.

Smuckers, $120, 4/15/16 100/95 collect $1.00
US Bancorp, $44, 6/17/16 37/35 collect 0.25
Boeing, $147, 5/20/16 125/120 collect 0.67
 
Smuckers, $120, 4/15/16 100/95 collect $1.00

I get :
SJM closed at $115
April 100/95 is bid at $30. OptionsXpress says I might get $78 , $1.00 very unlikely
Prob = 82%

Using $100 yield = 100/400 = 25% in 160 days or 57% annually
Expectation = .82(1.00) - .1(400) - .08(200) = 82 - 40 - 16 = 26

Using $78: yield = 78/422 = 18% in 160 days or 42% annually
Expectation = .82(78) - .1( 422) - .08(211) = 64 - 42 - 16.9 = 5.1

Using $30: yield = 30/470 = 6.3% in 160 days or 14.6% annually
Expectation = .82(30) - .1(470) - .08(235) = 24.6 - 47 - 18.8 = -42.1

http://stockcharts.com/h-sc/ui?s=sjm

http://finance.yahoo.com/q/ks?s=SJM+Key+Statistics

http://finance.yahoo.com/q/is?s=SJM

http://www.msn.com/en-us/money/stockdetails/financials/fi-126.1.SJM.NYS

http://www.dakotafinancialnews.com/j-m-smucker-downgraded-by-zacks-sjm/569010/

OK:
Certainly the SJM spread is a good proposal and would be better than my LMT IF I could get the $1.00

Looking at the recent fills I agree with OtionsXpress that $1.00 fill is very unlikely. Actually I am even skeptical of OXP's $78 and I feel I might get a fill closer to $50. $30 is a non starter.

At this point in time SJM has no news catalyst that would motivate stock buyers which would activate put activity. Zack's downgraded SJM from a buy to a hold which doesn't bother me. With regard to your question as to why I am choosing LMT I think the defense budget settlement (first reference) might promote some activity.

Thank you very much for your suggestions, I will investigate the other two in the morning.
 
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enjoytrading said:
Sure. I haven't done much research on these other than looking at the put spread screen and pricing / historical success rates in my app. I kept the same ~85% moneyness for your short strike.
More...

Are you using delta for moneyness or a more complex formula?
 
stevegee58 said:
Are you using delta for moneyness or a more complex formula?
More...
The standard formula for moneyness is strike price divided by underlying price. His trade was $185 strike puts on a $216 underlier, or roughly 85%. I looked for underliers where put spreads were generally trading cheaply on a historical basis using the the methodology described in my blog post below and then looked at pricing for 85% put spreads on those particular underliers. Hope this helps.

http://blog.getvolatility.com/2015/...-value-and-spread-trades-with-ratio-charting/
 
Let's skip to BA because I don't think your second example holds much promise.

BA: closed at 147
http://stockcharts.com/h-sc/ui?s=ba

http://finance.yahoo.com/q/ks?s=BA+Key+Statistics

http://www.msn.com/en-us/money/stockdetails/financials/fi-126.1.BA.NYS

The May 125/120 is bid at $56 ask at $78
Again looking at recent trades I think $60 is an optimistic but possible trade...I don't think you'll get $67.
Yield = 60/440 = 13.6% in 195 days or 25.5% annualized
Prob = 89%
Expectation = .89(60) - .06(440) - .05(220) = 57.2 - 26.4 - 11 = 19.8
(a positive expectation !!)

OK.
BA was one of three stocks mentioned in my original reference along with LMT.
http://finance.yahoo.com/news/defense-budget-settled-buy-defense-194207267.html

Yahoo provides a comparison table for LMT that includes BA:

http://finance.yahoo.com/q/co?s=LMT&ql=1

There are varying views of immediate prospects of BA vs LMT. Zack's ranks BA a buy and LMT a hold (I don't put a lot of weight on this small difference for a short term trade.)

BA has it's biggest exposure in airliners while LMT is more exclusively devoted to defense contracts.

Since the BA trade does have a positive expectation I might be willing to try to get a fill providing I don't turn up any information that would cancel this view.

Again, thanks very much for your interest.
 
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No problem, hope I was helpful. I used mid-market pricing at EOD for all of my calculations so agree that it might be tough to get filled at those levels. In my experience though if you're patient and can let the order sit for a little bit, you more often than not do get filled at mid-market.
 
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