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Four Beats. Four Selloffs. One Question.

Published May 10th, 2026

Start with the facts, because they’re genuinely strange.

Four major defense names reported Q1 2026 earnings. All four beat estimates. RTX beat by nearly 18% on EPS. GE Aerospace beat by $0.26 per share. Howmet Aerospace beat by 9.9%. Northrop Grumman cleared the revenue and EPS bar. And all four stocks dropped in the aftermath – RTX fell 7.6% in pre-market on its beat, GE slid roughly 3% before the open despite blowout orders, NOC ended the day essentially flat after initial weakness. The reaction was not what the numbers warranted.

That’s the market pricing something other than Q1 results. Whether you read it as crowded longs unwinding, guidance not being raised aggressively enough, or geopolitical overhang compressing the “defense premium” – the price action is a signal. And for options traders, that kind of dislocation between fundamentals and price is exactly where the work starts.

So. What does the data actually say now – post-selloff, with the July earnings cycle approaching – and where does the risk-reward sit?

The Budget Floor Is Confirmed. That Part Is Not the Problem.

U.S. defense spending in fiscal year 2026 crossed $1.05 trillion – a combination of $838.7 billion in the base appropriations act and an additional $150 billion pushed through reconciliation. Congress passed the bill on February 3rd with a 71–29 Senate vote. This is not a projection. It’s enacted law.

The structural argument for the sector runs deeper than one budget cycle. Multi-year procurement commitments are already embedded in B-21 low-rate initial production lots, the Sentinel ICBM program, Golden Dome missile defense development, and Tomahawk/AMRAAM replenishment contracts. These aren’t line items that disappear when a continuing resolution expires. They’re program-of-record commitments with contractual minimum quantities.

Slight tangent, but worth noting: there’s already preliminary discussion of a $1.5 trillion FY2027 defense request – a proposed 44% jump. Whether it passes intact is genuinely uncertain. The point is that even a partial version of that number materially extends the demand trajectory for every major contractor in this analysis. Options traders pricing 90-day moves on these names are working against a multi-year procurement backdrop that isn’t going away.

The Q1 Scorecard – What Each Beat Actually Meant

Four companies. Four different earnings quality stories. Each one creates a different options environment. Here’s the breakdown.

Northrop Grumman (NOC) – The Messy Beat

Revenue of $9.88 billion against a $9.76 billion estimate – 4.4% year-over-year growth, 1.2% above the consensus figure. GAAP EPS of $6.14, up dramatically from $3.32 in Q1 2025, beating estimates by roughly 1%. But the quality of that EPS improvement matters more than the headline. The surge was largely driven by the absence of a $477 million pre-tax B-21 loss provision that hit Q1 2025 – strip that out, and the underlying profitability improvement is meaningful but not as dramatic as the year-over-year comparison implies. Operating margin improved to 10% from 6.1% a year ago. Backlog came in at $96 billion, with $9.8 billion in new Q1 awards and a book-to-bill of approximately 0.99x – flat, not expanding. Free cash flow was negative $1.82 billion for the quarter, identical to Q1 2025. Full-year 2026 guidance was reaffirmed at $43.5–$44.0 billion in sales and free cash flow of $3.1–$3.5 billion. To hit that FCF number, NOC must generate roughly $4.9–$5.3 billion in free cash flow over the remaining three quarters. That’s the single most important variable to track before July.

The stock trades near $589 as of May 10 – well below the 52-week high of $774, a nearly 24% drawdown from peak. Consensus price target across 16 analysts sits near $727. That’s meaningful upside on paper, but the stock is also below its 200-day moving average, forward EPS estimates imply roughly 10.8% earnings shrinkage over the next twelve months, and five-year EPS growth has been weak at 3.2% annualized. The gap between analyst targets and the fundamental reality of flat backlog and FCF execution risk makes this a complicated long.

For options traders: NOC post-Q1 with oversold technicals and a 24% drawdown from peak is an interesting defined-risk environment, but not a clean directional one. Implied volatility on NOC tends to remain somewhat elevated following large moves. If you believe the stock stabilizes and recovers toward the $620–$650 range over 60–90 days – a reasonable scenario if the FCF execution story holds – a bull call spread in the September or October expiration (e.g., long the $600 call, short the $650 call) defines risk to the debit paid. Maximum loss is the premium. Maximum gain is the spread width minus the premium. For traders who believe the FCF gap in Q2 produces another leg lower: a put spread in the $560–$530 range with a July expiration captures that move with a defined maximum loss if the stock reverses on a contract announcement or geopolitical escalation.

RTX Corporation (RTX) – The Cleanest Beat, the Worst Reaction

This one is worth sitting with. RTX Q1 revenue came in at $22.1 billion against a $21.44 billion estimate – 9% year-over-year growth, 10% organically. Adjusted EPS of $1.78 beat the $1.51 consensus by 17.9%. Free cash flow of $1.3 billion was up $500 million from Q1 2025. The Raytheon segment – the one options traders should care most about – posted 9% organic sales growth to $6.9 billion, with munitions output up over 40% year-over-year and a trailing twelve-month book-to-bill of 1.48. Five framework agreements with the Department of Defense covering Tomahawk, AMRAAM, and the Standard Missile family provide demand visibility that management characterized as extending well beyond the current production cycle. The company raised full-year 2026 guidance: adjusted EPS to $6.70–$6.90 from $6.60–$6.80, adjusted sales to $92.5–$93.5 billion. Backlog reached a record $271 billion. Every number in this report was strong.

The stock still fell 7.6% in pre-market. Two reasons – and both matter for options positioning. First: RTX disclosed approximately $850 million in full-year tariff exposure under International Emergency Economic Powers Act costs. Management raised guidance knowing this headwind, which tells you they believe they can absorb it. The market discounted it anyway. Second: optimism around a potential U.S.–Iran ceasefire circulated on the morning of the report, which was read as compressing the near-term munitions demand premium. Both concerns are real. Neither of them changes the 1.48 book-to-bill or the record backlog. The OI put/call ratio on RTX sits near 0.79 – call-heavy, below the neutral 1.0 threshold. Options traders are not positioned bearishly, despite the drop.

RTX trades near $180–$185 as of this writing. For traders who believe the stock is mispriced relative to its earnings power and the $271 billion backlog: a bull put spread (selling a put at a lower strike, buying a further out-of-the-money put as protection) collects premium while defining maximum downside. If you expect RTX to grind toward the $195–$210 range over the next 90–120 days as the tariff headwind gets digested, a bull call spread in the July or August expiration – long the $185 call, short the $205 call – captures that move with capped risk. The $850 million tariff exposure is a known, discrete number. The framework agreements and 1.48 book-to-bill are structural positives that don’t evaporate on a ceasefire rumor.

GE Aerospace (GE) – Blowout Orders, Cautious Second Half

GE’s numbers were genuinely impressive. Revenue of $11.6 billion, up 24.6% year-over-year. Adjusted EPS of $1.86 – up 25% from the prior year – beat the $1.60 consensus by $0.26. Orders surged 87% to $23 billion. Defense and Propulsion Technologies revenue grew 19%, with F-110 and rotorcraft engine volumes both increasing. The remaining performance obligation expanded to over $210 billion. Free cash flow was $1.66 billion, up 14%. CEO Larry Culp described management as “trending toward the high end” of full-year guidance on the call. The stock fell 3.16% in pre-market anyway – declining from roughly $303 to $294 at the open – as investors focused on operating margins declining 200 basis points and the guidance assumption being adjusted to flat-to-low-single-digit departures growth for 2026, down from mid-single-digit. The stock currently trades near $297–$303.

Here’s where GE gets interesting for options traders specifically. Commercial engines and services account for more than 75% of revenue. That’s not a weakness – it’s actually a built-in hedge within what is also a defense story. GE’s $170 billion commercial services backlog, with 95% of Q2 spare parts revenue already secured, provides near-term cash flow visibility that de-risks the next two quarters even if macro pressures slow departures growth. The defense segment is additive. GE’s next earnings date is July 16. Analysts carry a median price target near $350, implying roughly 15–18% upside from current levels. For traders expecting a recovery toward the $320–$330 range ahead of Q2: a bull call spread in the July expiration with strikes in the $305–$330 range captures that move with defined risk. For neutral traders comfortable with the stock staying range-bound through mid-July: a short iron condor – selling the $320 call and $280 put, buying the $335 call and $265 put – collects premium in a defined band. Maximum gain equals the credit received if the stock stays between short strikes at expiration.

Howmet Aerospace (HWM) – The One That Actually Held

HWM bucked the sector-wide post-earnings weakness, and that alone tells you something. Q1 revenue came in at $2.31 billion, up 19.1% year-over-year, beating the $2.24 billion estimate. Adjusted EPS of $1.22 cleared the $1.11 consensus by 9.9%. EBITDA of $740 million was up 32%, with EBITDA margins expanding 320 basis points to 32.0%. Free cash flow of $359 million was a Q1 record. The company raised full-year 2026 guidance to $4.88–$5.00 adjusted EPS and issued Q2 guidance of $1.22–$1.24 EPS, both above prior consensus estimates. Defense aerospace revenue grew 10%. Higher-margin spares revenue – the combination of commercial aerospace, defense aerospace, and gas turbine spares – surged 36% to approximately $520 million, now representing 23% of total revenue versus 21% in all of 2025 and just 11% in 2019. That mix shift toward spares is a structural margin improvement story, not a one-quarter anomaly.

The picks-and-shovels framing is accurate and worth understanding. Howmet makes precision metal components for jet engines and structural airframes. It doesn’t win or lose based on individual contract awards. It wins when production volumes go up – and production volumes across both commercial and military aerospace are going up. The company also closed the $1.8 billion Consolidated Aerospace Manufacturing acquisition in April, adding to its fastener business. Analyst targets are clustered in the $300–$340 range: BNP Paribas reaffirmed outperform with a $340 target, Jefferies carries a $315 target with a buy rating, BTIG raised its target to $300. UBS holds a neutral at $290. The OI put/call ratio on HWM mirrors RTX at approximately 0.79 – call-heavy, not crowded with shorts. HWM trades near $270. Given the upcoming July 30 earnings date, a pre-earnings bull call spread (long the $275 call, short the $305 call, expiring mid-July) captures the upside move without full directional capital commitment.

What the Options Market Is Actually Saying Sector-Wide

The put/call picture across this sector is not what you’d expect after a round of post-earnings drops. RTX and HWM both carry OI put/call ratios near 0.79. That’s call-heavy. Options traders, in aggregate, are not piling into defensive put structures on these names. A put/call ratio above 1.2 would signal institutional hedging or outright bearish conviction. We’re not seeing that. What we are seeing is more consistent with a market that sold the news on strong earnings and is now quietly staying positioned for eventual recovery.

The post-earnings implied volatility crush is the other piece worth understanding. Going into Q1 reporting, IV on these names elevated as traders priced in the event risk. After the reports – even with the large price moves – IV collapsed. Traders who sold premium going into those reports collected the IV crush even when the underlying moved. That playbook sets up again for July: GE reports July 16, NOC July 21, RTX July 28, HWM July 30. IV on these names will start expanding again in mid-June as the market begins pricing in the next earnings cycle. That four-week window starting in mid-June is worth marking on the calendar now.

One more observation on sector bifurcation. At the high-multiple end of defense – Palantir, Kratos, AeroVironment – IV stays persistently elevated because forward earnings are highly uncertain at 100x+ forward multiples. At the lower-multiple end – NOC near 18x trailing, RTX near 32x trailing – IV is comparatively lower and more predictable. That creates a different options environment. Lower IV means you’re paying less premium for defined-risk structures on the large-cap contractors. The tradeoff is smaller absolute dollar moves on the underlying. The math works if the directional thesis is correct over the right time horizon.

ITA as a Sector Proxy – Cleaner Risk, Lower IV

If single-name binary risk feels too concentrated heading into the July earnings cycle, iShares U.S. Aerospace & Defense ETF (ITA) offers sector-level exposure with $13.4 billion in assets and a 52-week range of $158.55–$250.65. ITA recently crossed below its 200-day moving average – a technically significant level that has previously acted as support. It currently trades near $215–$223. GE Aerospace and RTX represent the top two holdings, comprising a substantial portion of the fund’s weighting.

For options traders: ITA options offer sector-level defined-risk structures without concentrating in any single name’s earnings timing. A bull call spread on ITA in the August or September expiration captures a broader sector recovery without being dependent on one company’s Q2 guide. A short put spread below the 200-day moving average generates premium income if the sector finds support at current levels. One-year net flows into ITA sit near $4.4 billion – institutional money is still coming in, even as the ETF pulls back from its 52-week high.

Three Risk Factors Options Traders Should Model Explicitly

• Tariff exposure – RTX’s known headwind: RTX has quantified its tariff exposure at approximately $850 million for FY2026 under IEEPA. That number is in the guidance. What remains uncertain is whether further tariff escalation hits HWM’s rare-earth and base metal sourcing costs or GE’s engine component supply chain. Both management teams specifically flagged tariff and geopolitical uncertainty as key H2 2026 risk factors. The answer will likely show up in Q2 guidance language, not Q2 revenue. Watch the commentary, not just the numbers.
• Ceasefire dynamics and munitions demand: RTX is the name most directly exposed to ceasefire probability. Tomahawk inventory drawdowns and AMRAAM replenishment contracts have been a meaningful demand driver. A durable U.S.–Iran ceasefire reduces that near-term urgency, even if the long-term framework agreements hold. The options market appears to be partially pricing this dynamic already – which may explain why put/call ratios haven’t spiked higher despite the selloffs. If ceasefire talks collapse, expect RTX to recover sharply.
• NOC free cash flow – the most important number to track: Northrop’s Q1 FCF was negative $1.82 billion. To hit full-year guidance of $3.1–$3.5 billion in free cash flow, the company needs to generate $4.9–$5.3 billion over Q2 through Q4. That’s a steep trajectory. The $2.5 billion in facility investment supporting the B-21 production ramp is a real capital commitment that competes with free cash flow generation. If Q2 FCF disappoints materially, expect NOC to test the $550–$560 range. The July 21 NOC earnings date carries more downside tail risk than the other three names in this analysis.

Structured Trade Framework – Four Analytical Templates

The following are analytical frameworks only. These are not trade recommendations. All options involve the risk of total loss of premium paid. Defined-risk structures limit maximum loss to the debit paid or the spread width minus premium received. Always verify current IV rank and available strikes before entering any position.

• Bull – RTX (recovery from post-earnings dislocation): For traders who believe RTX is mispriced at $180–$185 relative to its $6.70–$6.90 EPS guidance, record backlog, and 1.48 Raytheon book-to-bill: a bull call spread in the July or August expiration, long the $185 call, short the $205 call. Maximum loss equals the debit paid. Maximum gain equals $20 minus the debit paid, realized if RTX closes at or above $205 at expiration. The bear-case risk to this structure is a confirmed ceasefire driving further sector de-rating.
• Bear – NOC (FCF execution risk): For traders who believe the Q1 negative FCF of $1.82 billion, flat backlog at 0.99x book-to-bill, and 10.8% forward EPS contraction create continued pressure through the July 21 report: a put spread in the July expiration, long the $570 put, short the $540 put. Maximum loss equals the debit paid. Maximum gain equals $30 minus the debit paid, realized if NOC closes at or below $540 at expiration. Key risk: a large B-21 program award or Golden Dome contract announcement could lift the entire sector.
• Neutral – GE (range-bound through earnings): For traders who believe GE consolidates in the $280–$320 range through its July 16 earnings date: a short iron condor – selling the $315 call and the $285 put, buying the $330 call and the $270 put. Maximum gain is the total credit received if GE closes between the short strikes at expiration. Maximum loss is capped at the spread width minus the total credit received. This structure profits from time decay and range-bound price action.
• Long volatility – pre-earnings IV expansion play: For traders who believe the July earnings cycle will again produce outsized moves (Q1 saw 7.6%+ moves on strong beats), buying straddles or strangles on RTX or GE approximately 3–4 weeks before their respective earnings dates captures long volatility exposure ahead of expected IV expansion. This requires the underlying to move enough to overcome time decay – a real cost that grows daily. Position sizing matters here more than strike selection.

Where This Goes From Here

The fundamentals are not the problem. A trillion-dollar confirmed budget. NOC’s B-21 production rate increasing 25% with $2.5 billion in committed capital behind it. RTX’s Raytheon segment posting a 1.48 book-to-bill with five DoD framework agreements on Tomahawk and AMRAAM. GE’s $210 billion remaining performance obligation and 95% of Q2 spare parts revenue already secured. Howmet raising full-year guidance and generating a Q1 FCF record. None of that is soft.

What the sector lacks right now is price momentum. The broad selloff on legitimate beats with reaffirmed or raised guidance points to one of two things: the stocks ran too far ahead of Q1 expectations, or the market is front-running a second-half slowdown tied to ceasefire probability, tariff drag, or some combination of both. Both readings are at least partially defensible. The answer probably won’t be clear until the July earnings cycle.

Between now and then, the work is in the structure. Markets don’t move on what happened. They move on what’s priced relative to what comes next. Defense fundamentals are solid. Defense prices have discounted some of that solidity. The July cycle is the next real test. Defined-risk structures let you express a view on that test without betting the full position on a single outcome.

Tactical Checklist

• Verify current IV rank and IV percentile on NOC, RTX, GE, and HWM before entering any options position – post-earnings IV crush may have IV near 12-month lows, which favors long premium structures over short premium strategies
• Mark Q2 earnings dates now: GE (July 16), NOC (July 21), RTX (July 28), HWM (July 30) – IV expansion window begins approximately 3–4 weeks prior on each name
• Track NOC free cash flow in Q2 – the most critical single number in the sector right now; full-year guidance requires $4.9–$5.3 billion over the remaining three quarters
• Monitor RTX’s Raytheon segment book-to-bill and any ceasefire developments as the primary sentiment driver for the entire sector; those two variables will move RTX more than the next earnings report
• Consider ITA options as a lower-IV sector proxy if single-name earnings timing risk feels too concentrated heading into July
• Watch for FY2027 defense budget details – any confirmation near the $1.5 trillion figure is a material positive catalyst for the sector that could quickly change the current price picture
• For every defined-risk structure entered: confirm maximum loss does not exceed your pre-defined risk per position before execution

The edge is not in the view. It’s in the structure that lets you hold the view long enough for the market to come around.

– The Editorial Desk