IB Options Brief: Lockheed Martin Corp. (LMT) & Coca-Cola Co. (KO)
The Price Is Right For Lockheed Martin Corp. Call Buyers
LMT ñ Lockheed Martin Corp.
President Barack Obamaís proposal to cut $400 billion from the Pentagonís budget through 2023 sent shares in Lockheed Martin lower this week, providing one contrarian options player the opportunity to pick up May contract call options at a steep discount this morning. Lockheedís shares fell as much as 3.2% at the start of the session to touch an intraday low of $75.81, which marks a 6.7% total decline off Mondayís high of $81.22.
Talks of reining-in defense spending pushed some options players to put options, but most of the volume in LMT options on Thursday is in out-of-the-money calls. More than 10,500 calls changed hands at the May $80 strike on paltry previously existing open interest of just 452 contracts. It looks like most of these calls were purchased by bullish players positioning for a rebound in the price of the underlying stock by May expiration.
Investors may be picking up the calls in anticipation of a rally following Lockheed Martinís first-quarter earnings report on April 26, 2011. Call buyers paid an average premium of $0.81 per contract for the options this morning. Premium on the calls was up around $2.60 each at the start of the week, and had a price tag of $1.70 a-pop on Wednesday.
Plain-vanilla call buyers start making money if shares in Lockheed rise 3.9% over the current price of $77.79 to surpass the average breakeven point on the upside at $80.81 by expiration day next month. The overall reading of options implied volatility on LMT increased 14.1% to 23.53% by 11:55am.
KO ñ Coca-Cola Co.
The beverage manufacturer bubbled up on our scanners this morning after one strategist initiated a short strangle in long-dated Coke options. Shares in Coca-Cola Co. are outperforming the broader market this afternoon, trading as much as 1.15% higher to touch a multi-year high of $68.06 as of 12:00pm in New York.
The strangle-strategist sold 3,500 puts at the January 2013 $65 strike for a premium of $6.35 each, and sold the same number of calls at the January 2013 $70 strike at a premium of $4.45 apiece. Selling the time-rich options at the closest to-the-money strike prices yields gross premium of $10.80 per contract to the trader.
From an at-expiration view, the investor keeps the full amount of premium, roughly $3.78 million, if the price of the underlying settles within the boundaries of the strike prices described through expiration day in January 2013. The trader need not hold the position through expiration, however, and may be able to close out the position at an advantageous price.
Subsiding levels of options implied volatility, as well as the passage of time, will lower premium required to buy back the strangle at some future date. The Atlanta, GA-based beverage giant reports first-quarter earnings ahead of the opening bell on April 26, 2011.
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