2 Hard-Hit Defense Stocks in the Options Trading Crosshairs

Donald Trump's tweet has driven defense stocks Northrop Grumman Corporation (NYSE:NOC) and Raytheon Company (NYSE:RTN) lower

Dec 12, 2016 at 2:29 PM
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Defense stocks are taking it on the chin, after President-elect Donald Trump lashed out against of the biggest players in the aerospace sector. Northrop Grumman Corporation (NYSE:NOC) and Raytheon Company (NYSE:RTN) are both notably lower amid heavy stock volume, while their options pits have gone into overdrive.

While NOC is typically one of the best stocks during quadruple witching week, it's gotten off to a rough start. The shares have fallen 3.5% to trade at $230.19 -- with intraday volume in the 99th annual percentile -- and could close below their 50-day moving average for the first time since early October. In fact, since touching a record $253.80 in late November, NOC stock has plummeted over 9%.

Understandably, put players have picked up the pace in recent weeks. NOC's 10-day put/call volume ratio at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) is 1.92 -- just 11 percentage points from an annual high. Likewise, the stock's Schaeffer's put/call open interest ratio (SOIR) is 3.71 -- with short-term puts nearly quadrupling calls -- ranking in the high 98th percentile of its annual range.

Today, overall options volume is running at more than twice the usual intraday clip. The December series is in focus, accounting for six of the 10 most active strikes, with likely buy-to-open activity at the 225 and 230 calls.

Interestingly, while bearish betting toward Northrop Grumman Corporation has accelerated in the options pits, it's fallen off among short sellers. The stock saw one of the largest decreases in short interest during the most recent reporting period, diving 29%. In fact, a slim 1.4% of NOC's float is currently dedicated to these bearish bets.

Defense stock RTN is also tanking with its sector peers, down 2.6% at $142.55. At its intraday low, the shares had even closed their early November, post-election bull gap. Yet, the stock is still more than 14% higher on a year-to-date basis.

According to Trade-Alert, bearish betting is prevailing this afternoon, with puts outstripping calls and changing hands at twice the normal intraday pace. This echoes what's been seen recently at the ISE, CBOE, and PHLX, where RTN has racked up a 50-day put/call volume ratio of 1.12 -- outstripping 88% of readings from the prior year. As a result, the stock's SOIR has grown to 1.70, just 6 percentage points from a 12-month peak.

While options traders have displayed severe skepticism toward Raytheon Company, analysts have been all in, for the most part. Of the 11 brokerage firms with coverage on the stock, 10 have doled out  a "strong buy," compared to one "hold" and not a single "sell" opinion.

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