Northrop Grumman (NYSE:
NOC -
option chain) shares have moved higher today after with other large defense contractors after President Bush and Defense Secretary Gates recommended that President-elect Obama
increase overall defense spending for at least the next five years. This comes just one day after NOC CEO Ron Sugar said that he
expects steady spending for at least the next two years. If you think that the stock won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on NOC.
NOC opened this morning at $36.80. So far today the stock has hit a low of $35.24 and a high of $38.05. As of 12:35, NOC is trading at $37.70, up 90 cents (2.4%). The chart for NOC looks bullish and
S&P gives NOC a positive 4 STARS (out of 5) buy ranking.
For a bullish hedged play on this stock, I would consider a December
bull-put credit spread below the $30 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make an 8.7% return in just one month as long as NOC is above $30 at December expiration. NOC would have to fall by more than 20% before we would start to lose money.
NOC hasn't been below $35 at all in the past year and has shown support around $35.25 recently.
Brent Archer is an options analyst and writer at Investors Observer.
DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent neither owns nor controls positions in NOC.
Late last Friday, The Wall Street Journal reported that the Defense Department has ordered Lockheed Martin Corporation (NYSE: LMT) to cease work on a $13 billion contract to build helicopters for the White House. 
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