The GD’s 2013 low is 64.47, which it has rebounded off of the last two days. This trader is betting that this swing low holds as support between now and March expiration. If it cracks below this level the next stop is 62.00, which was a major support level for the stock in 2012. If this does not hold the stock then it could see a significant move downward to 56.00, which was the 2010 and 2011 lows.
The risks remain significant to the defense sector going forward, and although the stock has fallen quite a bit, buying in here could be like trying to catch a falling knife. That is why this trader chose a fixed risk spread position, which has a fraction of the risk of a short put or long stock position. There is significant event risk in the stock because of the sequester, which is scheduled to take effect on March 1st. If this is not avoided defense funds will be cut by 7.3%. Deputy Defense Secretary Ashton Carter on Jan. 29th said that it is “more likely than unlikely” that the reductions will take effect. Any cuts are likely to cause more selling in the stock, which is why downside risk needs to be kept minimal. Once defense spending is sorted out and there is some certainty GD may be a buy, but right here right now there is no compelling reason to be long because the risk/reward simply does not justify it.