Cherry Picking Puts on Defense

I mentioned in my weekly e-mail today that the big-cap defense sector might be ripe for a little short-side cherry picking. Specifically, AMEX lists a defense index (DFI) that includes all the big names in the industry (Raytheon, Boeing, Lockheed Martin, Northrop, and General Dynamics). DFI is making new 52-week highs on a daily basis in the last week. And it's not far below the high it made in its post 9-11 run up. WHAT WALL OF WORRY? DFI may be headed back to post 9-11 rally territory. But I'd be surprised. Instead, I'd look closely at put options. But I would not buy front month contracts. Technically, the index is in the kind of rally you don't want to get in the way of in the short term. But it might make a nice hedge if you have a bullish position in any of the defense stocks I've recommended.