Option Trade 
General Dynamics Corporation (NYSE:GD) Calls
Thursday, October 05, 2017

** OPTION TRADE: Buy the GD NOV 17 2017 220.000 CALL at approximately $2.00. Place a pre-determined sell at $4.00.

Also include a protective stop loss of $0.80.

Also Note: This is a recommendation and individual members can use their own discretion as to when to enter or exit!

by Ian Harvey   

General Dynamics Corporation (NYSE:GD), a global aerospace and defense company, will report earnings on October 24, before the market opens. This provides ample time for this options trade to play out before the earnings actually takes place.

The reasoning behind this is that implied volatility levels for General Dynamics Corporation tend to ramp up before an earnings announcement because the uncertainty regarding how the stock is going to react to the announcement escalates. So, with trades held through earnings announcements, even if the value of the underlying stock starts to move in the anticipated direction, the implied volatility of the options also declines post-earnings.

This type of option on GD is classed as a long Vega. This means that when implied volatility increases, it has a positive impact on the premium of the options — therefore, the appeal of trading before earnings.

It is expected that General Dynamics stock will benefit from a continued buy-back program in the short term that investors will likely continue to price in before the release. This position also provides a little bit of a hedge within the industrial sector while the market is so bullish.

Shares of General Dynamics have rallied 32.5% over a year, underperforming the industry’s gain of 49.3%. This may have been caused by the earlier budget cuts inflicted by the U.S. government in the defense space.

General Dynamics Corporation has a 12-month low of $148.76 and a 12-month high of $210.94. The firm has a market capitalization of $63.11 billion, a PE ratio of 20.80 and a beta of 0.72. The stock has a 50 day moving average price of $201.33 and a 200 day moving average price of $197.60.

Influencing Factors

General Dynamics just received a $5 billion contract from the U.S. Navy to complete the design of the next-generation ballistic missile submarine known as the Columbia-class submarine. The contract amount equates to 16% of the company’s expected 2017 revenue of $31.2 billion (consensus).

The Columbia-class submarines are nuclear-armed ballistic missile submarines that are designed to ensure a second strike capability in the event of a nuclear attack on the U.S. These subs will be a key part of the U.S. defense system to help deter rogue nations such as North Korea from engaging in a nuclear war.

The Columbia-class submarines are designed to have a 42 year service life. So, this project will be a long-term multiple-decade plan for the U.S. defense strategy. General Dynamics is likely to get more contracts from this segment over time as the U.S. maintains and upgrades its marine-based defense systems.

The Columbia-class submarines are part of General Dynamics’ Marine Systems segment.

The company has two other segments that can also thrive with the world’s ongoing threats: Combat Systems; and Information Systems/Technology [IS&T].

The company also has an Aerospace segment, which is primarily focused on business-class jets.

GD received a $311 million contract earlier this year to upgrade the Army Abrams tanks. More recently a $270 million contract was awarded to the company to produce 45 Abrams M1A2 SEPv3 tanks.

As well this military shipbuilder’s business unit, Ordnance and Tactical Systems (''OTS''), secured a modification contract worth $109.2 million for procuring Hydra rockets. Work related to this deal is scheduled to be over by Mar 31, 2020.

Being one of the major players in the defense business, General Dynamics boasts a diverse product and service portfolio along with a wide customer base. In North America, the company maintains a market-leading position in the supply of Hydra-70 rockets, in munitions space. Thanks to the significant demand for this high-end rocket system, General Dynamics has produced more than four million Hydra-70 rockets since 1996. The latest modification contract indicates this production number to increase substantially in coming days, which in turn will boost the company's growth trajectory.

According to a recent report by Transparency Market Research, the global rockets and missiles market is expected to reach a value worth $43 billion by 2025, reflecting a CAGR of 3.2% from 2016.

General Dynamics has a strong history of making acquisitions over the years. Earlier this year, the company acquired the Electronics and Communications Division of Advatech Pacific. This added to GD's Cyber security business.

General Dynamics’ strong ROE of 29% and ROIC of 21% can help drive earnings growth. The company is expected to grow earnings at about 7% in 2018 (consensus).

Analysts and Hedge Funds Opinions

General Dynamics Corporation was upgraded by Zacks Investment Research from a “hold” rating to a “buy” rating in a research note issued on Monday. The brokerage presently has a $230.00 price target on the aerospace company’s stock. Zacks Investment Research‘s price objective would indicate a potential upside of 11.88% from the stock’s previous close.

According to Zacks, “Being one of the only two contractors in the world equipped to build nuclear-powered submarines, General Dynamics’ diverse portfolio of products and services along with its wide customer base provides it with an opportunity to generate solid revenues from different sources. Moreover, the recently approved fiscal 2018 defense policy bill, which includes provision to spend $6 billion in Navy shipbuilding, will surely boost the company's growth trajectory. Also its Gulfstream business continues to grow on the back of solid jet sales.”

Also, General Dynamics Corporation‘s stock had its “hold” rating reaffirmed by equities research analysts at Deutsche Bank AG in a research report issued on Monday. They currently have a $210.00 price objective on the aerospace company’s stock, up from their prior price objective of $200.00.

Several other analysts have also recently commented on the company…..

  • ValuEngine upgraded shares of General Dynamics Corporation from a “hold” rating to a “buy” rating in a research report on Friday, September 1st.
  • Berenberg Bank started coverage on shares of General Dynamics Corporation in a research note on Wednesday, July 12th. They issued a “buy” rating and a $230.00 price target on the stock.
  • Jefferies Group LLC reaffirmed a “buy” rating and set a $220.00 price target on shares of General Dynamics Corporation in a report on Friday, July 7th.
  • UBS AG restated a “buy” rating and set a $225.00 target price (up from $215.00) on shares of General Dynamics Corporation in a research report on Monday, June 12th.
  • Finally, BidaskClub upgraded General Dynamics Corporation from a “hold” rating to a “buy” rating in a research note on Tuesday, August 8th.

Two research analysts have rated the stock with a sell rating, four have issued a hold rating and eleven have assigned a buy rating to the stock. The company has an average rating of “Buy” and an average price target of $220.12.

Several institutional investors have recently made changes to their positions in the stock, to name a few….

  • Teachers Advisors LLC boosted its holdings in General Dynamics Corporation by 92.8% in the first quarter. Teachers Advisors LLC now owns 578,526 shares of the aerospace company’s stock valued at $108,300,000 after purchasing an additional 278,394 shares during the period.
  • Burney Co. grew its stake in General Dynamics Corporation by 5.8% during the 1st quarter. Burney Co. now owns 25,410 shares of the aerospace company’s stock worth $4,757,000 after purchasing an additional 1,404 shares in the last quarter.
  • Boston Advisors LLC grew its stake in General Dynamics Corporation by 13.4% during the 2nd quarter. Boston Advisors LLC now owns 6,760 shares of the aerospace company’s stock worth $1,339,000 after purchasing an additional 800 shares in the last quarter.
  • Finally, Morgan Stanley grew its stake in General Dynamics Corporation by 12.2% during the 1st quarter. Morgan Stanley now owns 1,139,288 shares of the aerospace company’s stock worth $213,274,000 after purchasing an additional 124,077 shares in the last quarter.

Harvey’s Options Volatility Indicator

Summary

General Dynamics enjoys a dominant position as a Navy contractor. This is because it is one of the only two contractors in the world equipped to build nuclear-powered submarines. The company is also a prime contractor for the development of Columbia-class submarines and Virginia-class submarines.

Given the Navy's recent acknowledgement of the nuclear submarines as its top priority and the huge budget allotted to the same, the modification contract will undoubtedly render the company a leading position in the nuclear-powered submarine industry.

Recently, the U.S. Senate Armed Services Committee approved fiscal 2018 defense policy bill. The National Defense Authorization Act for fiscal 2018, worth $700 billion, includes $25 billion to boost Navy shipbuilding. Going forward, the bill is anticipated to boost revenue growth for General Dynamics, which is one of the prime shipbuilders in the United States.

Therefore, based on the facts above, and Harvey’s Options Volatility Indicator, the following option trade is recommended…..

** OPTION TRADE: Buy the GD NOV 17 2017 220.000 CALL at approximately $2.00. Place a pre-determined sell at $4.00.

Also include a protective stop loss of $0.80.

”Success is simple. Do what's right, the right way, at the right time.”

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Options traders win because they are successful.



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