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The US Air Force has requested an additional $20 billion dollars over and above its annual $115 billion payout. You can either be one of the poor SOB taxpayers who has to foot this bill, or you can act now to insure that you get a piece of this enormous pie.
The trick is to follow the money downstream to the outside contractors who receive the lion’s share of these billions. The SPADE Defense Index (AMEX: DXS) is a modified capitalization-weighted index comprised of 56 publicly traded companies involved with US defense, homeland security, and space efforts.
These are the guys who make ships, planes, missiles and munitions. They provide the hardware, software and training for battlespace awareness, C4ISR, network centric warfare, homeland security, including border security and biometric and screening systems, space systems and satellite services.
Many of these names should be quite familiar to you, while others are known only to the cognoscenti, the defense tech insiders who track the secret projects that will receive so much of the Air Force’s largesse.
PowerShares Capital Management maintains the PowerShares Aerospace and Defense ETF (PPA: AMEX) based entirely on the SPADE index. Over the past 18 months, it has broken out twice from steep to steeper rising trends, gaining some 37% on the way.
The PPA chart is currently showing signs of yet another break out, with share prices projected to rise through $24.01 and on to $25.78, a total gain of roughly 9%. The best vehicle for leveraging this move is the PPA March 2008 20 Call, currently offered for $450 with an intrinsic value of $351 and a delta of 0.89.
The PPA’s projected rise will increase this contract’s value 45% to $652 over the next six weeks. But that’s just the beginning. The carry charge for this contract is a mere $16.50 a month through next March. With all this love being showered on the Pentagon, this ETF could quite possibly move as high as $903, for a clean 100% gain in less than six months.
Additionally, I suggest that you hedge against volatility by purchasing one PPA March 2008 21 Put contract, currently available for a mere $65, for each call contract. This put contract will absorb any short-term dips in the PPA as we move through the budget approval process.
Adam Lass,
Market Analyst, WaveStrength Options Weekly
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