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2 Defense Stocks With Cheap Options

Karee Venema

Defense stocks have been in focus this week, following weekend drone strikes against crude production facilities in Saudi Arabia prompting U.S. President Donald Trump to tweet about new sanctions on Iran -- which is behind the airstrikes, according to the White House. The bulk of this price action has been to the upside, with the SPDR S&P Aerospace & Defense (XAR) hitting a record high of $112.29 yesterday, last seen trading down 0.5% at $111.52.

Two XAR components that are worth watching are Northrop Grumman Corporation (NYSE:NOC) and Lockheed Martin Corporation (NYSE:LMT), both of which are trading near new highs while implied volatilities are at historical lows. This combination has been bullish for the defense stocks in the past, suggesting more upside could be in store for NOC and LMT.

According to data from Schaeffer's Senior Quantitative Analyst Rocky White, there have been eight times in the past five years when NOC stock was trading within 2% of its 52-week high, while its Schaeffer's Volatility Index (SVI) ranked in the 20th annual percentile or lower -- as is Northrop Grumman's SVI of 22%.

One month after these previous signals, NOC stock was up 2.8%, with 63% of the returns positive. Another move of this magnitude would put the security near $384 -- above its Aug. 13 all-time peak at $377.34 -- based on its current perch at $374.14. The equity is already up 52.4% year-to-date, and recently took a sharp bounce off its rising 40-day moving average.

noc stock daily price chart on sept 18

Meanwhile, White's data shows eight times in the past five years where LMT was hovering within 2% of a new annual high while its SVI was so low. The shares were up 2.2%, on average, one month later, with three-quarters of the returns positive.

At last check, Lockheed Martin shares were down 0.3% at $393. Another 2.2% bounce would put LMT stock north of $400 for the first time ever, and north of yesterday's record peak at $399.96. The shares have already added 50% in 2019 thanks to steady support at its 40-day moving average, up 8% so far this quarter.

lmt stock daily price chart on sept 18