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Generating Income From Northrop Grumman's Lock On Defense

Jun. 11, 2020 6:11 PM ETNorthrop Grumman Corporation (NOC)5 Comments


  • Aerospace and Defense is one of the best historical performers in the market.
  • Oligopolies make for terrific investments.
  • Northrop Grumman is one of the all-time great American companies that can be had for a value price.
  • Selling naked puts against it is a fine way to generate income and possibly have the stock put to you below intrinsic value.


Let's talk aerospace and defense.

The sheer complexity of every element of these sectors, in terms of actually building stuff that works and has no margin of error for failure, is impossible to conceive for us mere mortals.

All of the things that go into making a plane fly, a missile soar, and spaceships launch are truly miracles of human ingenuity that remain unparalleled achievements in human history.

Engineering, physics, mathematics, construction, metallurgy, logistics… it's impossible to name all the disciplines and expertise that create these strange objects that transport people and wage war.

Which is why this sector is effectively an oligopoly, although it has a few more players than most oligopolies. That also means there is an extraordinarily high barrier to entry. It's also far too late for new players to enter the game in any large way. Only small firms with expertise in a niche can get in.

Defense and aerospace are an essential part of every developed nation. In America, national security eats up a huge part of the federal budget even in peacetime and even with dovish administrations. Simply put, America does not exist without these sectors.

We've learned that while it stinks not to be able to go to restaurants, we don't need them. We will always need aerospace and defense.

Northrop Grumman (NYSE:NOC) is an 81-year-old company that specializes in security and defense. Remember a few paragraphs ago where we described, in general, the complexity of this business. Read this description of everything NOC does and be awed:

Northrop Grumman Corporation provides various systems, products, and solutions in autonomous systems, cyber, space, strike, and logistics and modernization, as well as in command, control, communications and computers, intelligence, surveillance, and reconnaissance (C4ISR). It designs, develops, integrates, and produces manned aircrafts, autonomous systems, spacecraft systems, high-energy laser systems, microelectronics, and other systems and sub-systems for use in the areas of intelligence, surveillance and reconnaissance, strike operations, communications, earth observations, and space

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Comments (5)

Ice_Kold profile picture
In my opinion NOC is one of the best companies. The share count has also decreased over time.
Great pick here - lmt too
If you're concerned about t risk, you could do a PUT spread any where up to Jan 2021. This limits your exposure, you receive the premium difference and buy the stock at a price you like if its assigned to you. You can close out the position anytime along the option term and you can manage the spread shares to get to the amount of shares you want to buy if assigned. Otherwise, enjoy the premiums you receive!
That makes like no sense , if you open a credit put spread you get a defined payout and a defined loss if you get assigned...so you don't want it to be excercised
Ventureshadow profile picture
How to handle put spreads can evolve with time and produce unexpected profits. In one case after I wrote a bullish put spread (on Regeneron) the stock fell enormously, and I sold the put I had bought as part of the pair. The stock then rose back to where it had been and the put I had sold expired worthless. Both parts of the spread were profitable. Can you expect such volatility? Sure you can. Just pick an expiry date far in the future.

Moreover, a put spread requires far less margin than a single naked put, far less. Of course, if you close one leg of the spread as I described above you will need plenty of margin.

In an analogous but different situation I recently bought a bullish call spread on FSLY. When the stock rose I sold half my lower-strike calls and bought to close all my higher-strike calls. This left me break-even in cash yet still holding half my lower-strike calls (and nothing else) with a cost basis of zero, as I still expect FSLY to continue rising.

So, option spreads can work to decrease risk and give much better than defined payouts if you modify them before expiry.

@Eformula @FCARONE @Financial Freedom Institute
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