North Korea tested a nuclear bomb and all stocks went down with the exception of Defense Stocks. As the North Korean drama plays out, for good or for ill, these investments will do well. Is it too late to get into defense stocks? CNBC writes that defense stocks surge on tensions and consolidation in the industry.

Defense stocks rose broadly Tuesday as tension between North Korea and the West mounted. Investors also loaded up on these names after a blockbuster merger deal.
Shares of Raytheon rose 0.6 percent to a new all-time high, while Lockheed Martin also advanced even as the broader market declined on the increased geopolitical tensions.

Defense shares have been among the best-performing stocks under President Donald Trump. Lockheed and Raytheon shares are up more than 20 percent this year, whole Northrop’s stock has risen more than 15 percent.

It is possible that the run up of defense stocks in the Trump era has anticipated future gains. If that is the case it is too late to get into defense stocks. And what happens when things cool down on the Korean Peninsula? How about put options or shorts?

Puts on Defense?

If you bought defense stocks when Trump entered office you have seen a nice run up in value. Increased tensions in East Asia can only help your stocks. But what happens next? Put options on defense stocks will preserve your opportunity to profit if prices go up while protecting your holding if peace breaks out and there is a correction. Options-Trading-Education.com explains call and put options.

A call contract gives the buyer the option to purchase the underlying equity which he will do if the equity price moves in the direction anticipated. A call contract confers an obligation on the seller (writer) of the call option to sell the underlying equity if the buyer executes the contract. Similarly a put contract gives the buyer the option to sell the underlying equity which he will do if the equity price moves in the direction anticipated. A put contract confers an obligation on the seller (writer) of the put option to buy the underlying equity if the buyer executes the contract.

If it is too late to get into defense stocks options will help you hedge risk in a potentially volatile market. But what if you truly expect defense stocks to fall?

Shorting Defense Stocks

If you believe that defense stocks have run their course you can short them.

An often effective means of profiting from a falling stock is to short it. Shorting is when a trader sells a stock that he does not own. Essentially he borrows the stock from his stock broker and has to have money in a trading account to cover potential losses. In addition the trader who shorts a stock pays interest on the loan of the stock for the duration of the short. When to short stocks is when you expect the stock to fall in price. When to short stocks is when the trader seeks to leverage his or her trading capital.

Shorting stocks is a little like buying options in that the trader enters into a position with a lower capital investment than when he buys a stock and can often gain multiples of the cost of engaging in a short. Unlike options trading, the trader is obligated to buy back the stock at some point in time.

If you are going to short defense stocks you want to be certain that the prices are going down as opposed to buying put options in which case you are protected against huge risk.