Once-in-a-Blue-Moon Volatility Gets Bluer

Rebecca Darst

Our thesis that implied volatility in defense contractor Lockheed Martin (LMT: NYSE) had reached aberrant levels led us to enter a short put spread in the front-month options. We took a $5.40 premium in the expectation that the spread between the strikes would narrow, which we had hoped would have allowed us to close the position profitably.

While Lockheed Martin's implied volatility was (and remains) at preternaturally high levels, since entering this position, the spread has moved against us by some 50% and both put strikes are now at in-the-money levels. This is an unacceptable level of risk exposure and a signal to us to cut our losses. So we will remove this position pending greater resolution in the broader market.

The Trade:
-- Buy to close 10 October 110 puts (LMTVB).
-- Sell to close 10 October 100 puts (LMTVT).

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