Lockheed Martin Corporation Diagonal Call Spread

Summary: On Tuesday, following a several week decline in the price of Lockheed Martin stock (ticker symbol: LMT) to the $75 range, a price at which I think LMT is a compelling medium to long term investment because of its historically low multiple of earnings, conservative capitalization and long term market advantage (see my original LMT post dated 10/17), I took the opportunity to establish a new diagonal call spread by selling ten Feb 75 Calls for $2,950, and purchasing ten June 70s for $7,900 (or a net debit of $4,950 ($4.95 per spread), less commissions). This represents a second bite at the apple - see my 12/24 post where I discuss closing out a previous LMT diagonal call spread for a net profit of $1,148.22. The profit and loss chart on the position looks something like the following:




Break-Even Price: Break-even price is likely around $72.5 per share depending on implied volatility at the February expiration.

Maximum Profit Price: Max-profit is at $75 per share. Note that the options I am short are in-the-money. Because I don't think LMT has much upside potential over the next couple of months, I've chosen a position that will profit if the stock largely stays flat or moderately declines. Nevertheless, because my net debit for each spread was below $5.00 (the difference in strike prices), the position won't lose money on the upside, it just won't be profitable.

Potential Downside: Downside is limited to the net debit, or $4,950.

Greeks: As of today, position delta was around 100, which will rapidly decline to 0 if the stock price increases (as discussed above, max profit is at $75, below today's stock price of $76.84). Position theta is substantial at around 20 (theoretical $20 per day due to time decay assuming static price and IV) and will increase as we near expiration assuming a relatively flat stock price. Like any calendar or diagonal call where the investor buys the long dated option and sells the short dated option, the position has positive exposure to vega, or implied volatility.

Follow-Up: In the event LMT stock declines drastically before expiration, I will look to add exposure so long as LMT's fundamental strength remains intact. Like my original LMT diagonal call spread, the optimal turn of events would be for LMT to stay in the mid 70s prior to expiration, allowing me to roll the February 75s to a later month while keeping the June 70s.