NEW YORK (TheStreet) -- Northrop Grumman (NOC) - Get Northrop Grumman Corporation Report 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.
Still, options action during midday trading suggests at least one investor anticipates limited upside in the stock throughout the longer-term.
NOC shares, which reached a 52-week high of $69.63 during morning trading today, 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 a short call position to a higher strike, but a closer look indicates that an 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.
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%.
By Jud Pyle in Chicago
Jud Pyle, CFA, is the chief investment strategist for Options News Network. Pyle started his career in finance in 1994 as a derivative analyst with SBC Warburg. After four years with Warburg, Pyle joined PEAK6 Investments, L.P., in 1998 as an equity options trader and as chief risk officer. A native of Minneapolis, Pyle received his bachelor's degree in economics and history from Colgate University in 1994. As a trader, Pyle traded on average over 5,000 contracts per day, and over 1.2 million contracts per year. He also built the stock group for all PEAK6 Investments, L.P. hedging, which currently trades on average over 5 million shares per day, and over 1 billion shares per year. Further, from 2004-06, he managed the trading and risk management for PEAK6 Investments L.P.'s lead market-maker operation on the former PCX exchange, which traded more than 10,000 contracts per day. Pyle is the "Mad About Options" resident expert. He is also a regular contributor to "Options Physics."