Lockheed Martin: Defend Your Position with Covered Calls

Lockheed Martin (LMT) looks attractive here, but given the recent market runup it may be safer to use protect the position by writing covered calls against it. Sometimes I'll write call options with two different strike prices against the same stock position. The lower strike price is for defensive purposes at a call price level where I would be comfortable owning more of the stock. The higher strike price is at a sell target price where I would not mind if the stock is called away. Lockheed Martin closed at 106.93 on Friday.

Right now, I would be willing to buy at 100 and would be comfortable selling at 120. So if I were long 1000 shares of LMT, I would write 5 call options with a 100 strike price and 5 call options with a 120 strike price. I usually use longer term (but liquid) options to minimize slippage and commissions, so I would use the Jan. 2009 leap options which are fairly liquid.

Here are some reasons I like LMT:

1. Lockheed Martin is the leading aerospace company in the US and has had good earnings growth, but its PE ratio is lower than average for its industry.
2. Strong cash flows.
3. Return on equity [ROE] is about 43%, which is well above average for the aerospace group.
4. Strong sponsorship: I checked stockpickr.com, and some savvy investors are large LMT owners: Renaissance Technologies, Ken Fisher, Al Frank and Lou Navellier.
5. I like investing in the F-22 Raptor fighter plane. The F-22 is claimed by many to be the world’s most effective fighter aircraft. Lockheed recently reported a big success at the recent Joint Expeditionary Force Experiment 2008 (JEFX 08).
   
   "Lockheed Martin was excited about the Air Force's decision to demonstrate the value of sharing F-22 ISR data with other fighters and back to the Combined Air Operations Center," said Larry Lawson, Lockheed Martin Aeronautics Company executive vice president and F-22 general program manager. "This is the first time in history that F-22 sensor data was down-linked to the Combined Air Operations Center [CAOC] using a tactical network." This should lead to increased F-22 business going forward.

Full Disclosure: I am long a small "starter" position in LMT, but am planning to buy more shares and write covered calls against them.

Comments

[Sternberg]

The F22 contract will complete in a very few years, and there will be no more of them built. We will sell none to any foreign government.
The real money at LMT is going to be coming in from the F35. That aircraft is going to go on for years and will be sold at least to eight of our Allies.