Longer-term moderate bearishness in Northrop Grumman (NYSE: NOC)


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Editor's note: On April 28 ahead of the opening bell, NOC announced earnings of $1.53 per share, which beat estimates of $1.32 a share. In pre-market trading, the stock was priced at $68.96.

Northrop Grumman Corp. (NYSE: NOC ) shares are relatively unchanged ahead of the aerospace company's earnings and following published reports that the U.S. Navy announced plans to provide lead materials for one of the company's missile destroyers, but options action during midday trading suggests at least one investor anticipates limited upside in the stock throughout the longer-term.

NOC shares reached a 52-week high of $69.63 during morning trading today, and have sold off slightly to $69.02. The stock is relatively unchanged so far on the day following reports that the U.S. Navy awarded a $114 million contract modification to provide long lead materials to a missile destroyer. NOC earnings are due on April 28 before the market opens, and analysts estimate earnings of $1.32 per share.

Around 11:55 a.m. EST, a block of 7,000 January 2011 70-80 call spreads changed hands for a premium of $3 per spread. The January 2011 70 calls are home to current open interest of 8,200 contracts, while current open interest of the January 2011 80 calls is 199 contracts. Judging from the current open interest level, the investor could have rolled up to a higher strike, but we will have to wait to look at open interest levels tomorrow morning to verify the action. Another possibility is the investor opened a bear call spread on a bet that NOC shares could be hard-pressed to rally significantly throughout the next nine months. It looks like the investor sold the January 70 calls for $4.20 per contract and simultaneously bought the January 80-strike calls for $1.20 per contract. This trade caps any gains at the premium collected, or $3 per spread and the investor makes money if the stock stays below the breakeven price of $73. This bear call spread caps the maximum loss at $7 per spread if the stock climbs higher than $80 prior to January 2011 options expiration.

Consult the graph below for a visual of the risk/reward dynamics of this bear call spread. You can build your own and assess other essential trading tools by opening a free virtual trading account today.

Implied volatility of the January 70 calls is 25% while the January 80 calls have an implied volatility of 19%. The 30-day historical volatility of NOC shares is 12%.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Options

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Jud Pyle

Jud Pyle

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