Option Traders Play Defense Amid Trump Budget Buzz

The president is reportedly changing his tune on defense spending

Defense stocks are higher today, bucking the broad-market sell-off, amid reports that President Donald Trump is performing an about-face on defense spending. The president in October said the defense budget for 2020 would be $700 billion, about a 5% cut, but rumor has it he told Defense Secretary Jim Mattis to submit a $750 billion budget. Against this backdrop, shares of Lockheed Martin Corporation (NYSE:LMT) and Raytheon Company (NYSE:RTN) are higher, and LMT and RTN options are more active than usual.

Lockheed Martin stock was last seen 3.3% higher to trade at $294.73, after last week touching an annual low of $277.22. The shares are still down more than 14% in the fourth quarter, but pullbacks have been contained in the $285 area. Meanwhile, the $290 level represents a 20% pullback -- and bear-market territory -- from LMT stock's February all-time high of $363. Prior to today, the security's 14-day Relative Strength Index (RSI) sat at 31 -- near oversold territory, suggesting a short-term bounce may have been in the cards.

In early afternoon action, Lockheed calls are trading at twice the average intraday pace, with roughly 2,800 contracts exchanged thus far. That's compared to fewer than 1,400 puts traded. The weekly 12/14 300-strike call is most active, though it appears some speculators are selling the options to open. If so, the traders expect the round-number $300 level to remain a short-term ceiling for LMT shares through the end of this week, when the options expire.

Bearish options betting has been ramping up on LMT in the past couple of weeks. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the equity's 10-day put/call volume ratio of 0.91 stands in the 89th percentile of its annual range. This tells us that while long calls have outnumbered puts on an absolute basis, the pace of bearish betting has been faster than usual lately.

Raytheon shares were last seen 2.9% higher to trade at $169.95. As with LMT, RTN last week fell to its lowest point since mid-2017, dropping to $162.31 on Dec. 6. The equity is down about 18% so far in the fourth quarter, and roughly 26% since its April 24 record peak of $229.75. The stock's 14-day RSI stood at 32, as of Friday's close.

RTN has seen about 2,400 calls and a near-equal number of puts change hands today, compared to its average intraday volume of roughly 1,400 calls and 1,300 puts. As such, the equity's 30-day at-the-money implied volatility stands at 29.3%, in the 99th percentile of its annual range.

Garnering notable attention today have been the weekly 12/14 165-strike put and 177.50-strike call, where new positions are being opened. Buyers of the puts expect Raytheon stock to resume its slide and breach $165 by Friday's close, while the call buyers expect RTN to continue higher and top $177.50 by the weekend.

Even before today, short-term option traders were paying up to speculate on RTN. The stock's Schaeffer's Volatility Index (SVI) of 33% is in the 97th percentile of its annual range, indicating near-term options are pricing in relatively lofty volatility expectations for the defense stock.