Defense stocks are in focus because of possible spending cut. How to play it with options

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Defense stocks are in focus because of possible spending cut. How to play it with options

So far in 2025, the top contractors for the US Department of Defense (DoD), often referred to as the “defense primes,” have been quite the mixed bag in terms of performance year-to-date. Here are the five largest “primes:” Of these five, Boeing has been hardest hit by issues related to its commercial aircraft division, the 737, the company’s most significant profit contributor. As build rates have improved, so has the company’s share price. Lockheed Martin , General Dynamics , and Northrop Grumman are likely trading lower on aggressive efforts to lower government spending, including the budget for the DoD. Defense Secretary Pete Hegseth sent a memo to senior military leaders outlining plans to cut 8% of the defense budget “each of the next five years,” according to the Washington Post . With proposed defense spending cuts this deep, one might wonder why RTX is not only the best-performing defense “prime” but also comfortably outperforming the S & P 500 this year. The answer may be that the commander in chief has a list of categories exempted from the proposed cuts, and missile defense, a specialty of RTX affiliate Raytheon, features prominently in that list. President Donald Trump, possibly impressed by the “Iron Dome,” Israel’s air defense system, wants one for the United States. Americans have understood the appeal of a virtual force field since the Star War Initiative during Reagan’s presidency. Israel’s air defense system contributes to the perceived military asymmetry in the region. But a missile defense system in the United States has few similarities to the threats posed to Israel. Potential “near-peer” military adversaries would not use $800 Qassam rockets with a 3-mile range. Between the nature of the threats, such as inter-continental ballistic and hypersonic missiles, and the difference in size (Israel is about the size of New Jersey), the “iron dome” name is virtually the only thing a US anti-ballistic defense system would have in common with the system deployed in Israel. Defense spending is a tricky business with many competing interests that don’t necessarily yield the most effective value for money. To understand why, consider that the DoD, which has never passed a GAO audit, releases financial data highlighting how the money is distributed to different states. Put differently, the DoD does not select the best available products at the best available prices to best suit the defensive needs of the nation. Instead, resources are allocated to competing interests within the DoD by a member of Congress hoping for spending in their state and so on. The trade An enormous air and missile defense build-out would likely be a boon from RTX’s perspective but possibly a boondoggle from the taxpayers. Regarding value for money, products from privately held defense start-up Anduril arguably show more promise. For this reason, I am less inclined to believe that RTX’s enormous outperformance over other primes like Lockheed will persist once these defense spending priorities face closer scrutiny. The April $120/$115 put spread, which costs about $1 ($100 in total, as each contract represents 100 shares), is one way to either hedge the recent gains for those who own the shares or bet that RTX’s performance will revert to some of its defense prime peers over the next couple of months. The trade : Buy RTX Apr. 17 $120 put Sell RTX Apr. 17 $115 put DISCLOSURES: (None) All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.

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#Defense #stocks #focus #spending #cut #play #options

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