The strikes on Iran over the weekend created immediate demand shifts in two markets simultaneously: defense systems and oil.
After Iran’s supreme leader was killed in a U.S. and Israeli attack, Iran retaliated with a barrage targeting Israel, the UAE, Bahrain, Qatar, Kuwait, Saudi Arabia, Iraq, Jordan, and Oman. The attacks hit not just military installations but commercial and civilian targets across the region.
Whether diplomatic talks produce results or not, one thing is clear: the need for missile defense systems in the region just increased dramatically. And oil markets are pricing in the risk of prolonged conflict and potential disruption at the Strait of Hormuz, which handles 20% of global oil and LNG shipments.
Here’s the problem for investors: the stocks that benefit most from this situation have already rallied hard. Lockheed Martin is up nearly 50% since December 1st. RTX has gained 21%. Occidental Petroleum is up 26%.
So how do you get exposure to a trade that’s already moved without chasing stocks at elevated levels?
The Defense Demand Picture
When ballistic missiles and one-way drones fly in large salvos, inventory matters. The more defense systems available, the better. Missile defense operates as a layered architecture with different systems handling different threats.
THAAD (Terminal High Altitude Area Defense), made by Lockheed Martin, intercepts ballistic missiles at high altitudes both outside and inside the atmosphere. Patriot surface-to-air missiles, made by Raytheon (a unit of RTX), work at closer ranges and lower altitudes.
In late January, Lockheed announced a framework agreement to more than quadruple THAAD interceptor capacity. The CEO was explicit: “We will have more interceptors available than ever before to deter our adversaries.”
The events over the past few days suggest these systems are needed for more than deterrence. There’s an immediate defensive need in an active conflict zone.
Iran’s attacks also used large numbers of one-way drones rather than just missiles. Existing systems like Patriot can target these, but there’s a cost problem. A Patriot missile battery can cost $1 billion including missiles that run millions each. Using that to counter drones that cost $50,000 each isn’t sustainable economically.
New UAV-based interceptor systems are being developed, but for now, Raytheon’s systems remain the most effective option. That means continued demand for RTX’s products.
The Oil Equation
Oil prices spiked on the news. Brent crude hit over $82 per barrel overnight before pulling back to around $76, still about 7% higher than a week earlier.
The surge reflects risk of prolonged conflict and the potential for disruption at the Strait of Hormuz. Shipping insurance providers have reportedly been issuing 48-hour cancellation notices. Even if ship crews were willing to navigate a war zone, owners won’t allow it without insurance coverage.
For investors, this creates an opportunity in oil producers with U.S.-based operations rather than Middle East exposure. Occidental Petroleum fits that profile. The company’s core operations are in the Permian and Rockies basins, with a global footprint but operational anchor in the U.S.
Higher oil prices flow directly to upstream exploration and production cash flows. While Occidental does have some Middle East partnerships, its growth engine is U.S. shale, which reduces direct operational disruption risk compared to producers with physical assets in conflict zones.
The Challenge: You’re Late to the Trade
Defense and oil stocks positioned for this exact scenario have already moved significantly. RTX is up 21%, Lockheed nearly 50%, and Occidental 26% since early December.
Implied volatility in all three stocks is well above the six-month average. That matters because it makes options more expensive. When you’re buying calls on stocks that have already rallied and have elevated volatility, you’re paying a premium for both the move that’s already happened and the uncertainty priced into the options.
Chasing these stocks here feels uncomfortable. Buying expensive call options after a big move doesn’t feel much better.
But there’s a way to structure trades that gives you upside participation while managing the risk of buying after a sharp rally.
The Trade: Legging Into a Position
The strategy involves using options spreads, but not all at once. You leg into the trade, starting with one piece and adding additional components only if conditions warrant.
Let’s use Occidental (OXY) as the example. Here’s how it works:
Step 1: Buy the Call Spread
Purchase the June 52.5/60 call spread for approximately $2.75 (based on Friday’s pricing before the weekend strikes).
This means:
- Buy the June $52.50 call
- Sell the June $60 call
- Net cost: $2.75 per share ($275 per contract)
This gives you upside exposure if OXY continues to rally. Your maximum gain is $7.50 per share (the width of the spread) minus the $2.75 you paid, for a maximum profit of $4.75 per share if OXY is above $60 at expiration.
Your maximum loss is the $2.75 you paid for the spread.
Step 2: Wait and See
Here’s where the strategy gets interesting. You don’t complete the full position immediately. You wait to see how the situation develops.
If OXY continues running higher, you’ve got your call spread working. You’re participating in the upside with defined risk.
But if diplomatic efforts gain traction and oil prices settle down, OXY and other energy stocks might pull back from current levels. That’s when you add the second leg.
Step 3: Sell the Put (Only If Conditions Support It)
If OXY pulls back a bit, you then sell a put at a strike price below the current market, targeting premium collection approximately equal to the $2.75 you paid for the call spread.
This converts your position into a call spread risk reversal, effectively getting you into the trade for near-zero net cost. But you only do this if the pullback makes the risk-reward attractive.
The put you sell represents your willingness to own OXY shares at that strike price. If you’re comfortable owning the stock there (which you should be if you’re bullish enough to buy the call spread), then selling the put makes sense.
If the put gets assigned, you own shares at a lower price than where they’re trading now. If it doesn’t, you collected premium that offset the cost of your call spread.
Why This Works
Options spreads don’t have to be all-or-nothing constructions. You can trade one leg, or two legs, and only add additional components as conditions warrant.
In this case, you’re starting with defined-risk upside exposure through the call spread. You’re not chasing the stock after its big move, and you’re not paying for expensive outright calls.
If the rally continues, your call spread captures that. If there’s a pullback, you have the opportunity to sell a put at levels where you’d be comfortable owning the stock anyway, effectively reducing or eliminating your net cost.
The same logic applies to Lockheed Martin (up nearly 50% since December) or RTX (up 21%). The strikes, valuations, and specific spreads would differ, but the strategy is identical: start with a call spread for defined-risk upside, then consider adding a short put only if the stock pulls back to levels where ownership makes sense.
The Risks to Understand
If oil prices collapse because diplomatic efforts succeed quickly, your call spread could lose significant value or worst case expire worthless. You’d lose the $2.75 per share you paid.
If you sell the put and the stock drops hard, you could get assigned shares well below current prices. That’s only acceptable if you’re genuinely willing to own the stock at that level.
And if volatility collapses along with the stock price, the premium you collect from selling the put might not be enough to offset your call spread cost.
But for traders who want exposure to the defense and oil thesis without chasing stocks that have already rallied 20-50%, legging into spread positions offers a more strategic entry point than buying shares or expensive calls at current levels.
The geopolitical situation has created real demand for defense systems and pushed oil prices higher. The stocks have moved, but the trade might not be over. You just need a smarter way to get in.
