This Healthcare Stock Is Turning Ill

This Healthcare Stock Is Turning Ill

Posted On May 13, 2015 12:08 pm

After a long period of strong and steady performance this healthcare insurance provider might take a turn for the worse. Turn the tables on health insurers and start collecting premiums using this options strategy.

A few years ago the healthcare industry faced the great uncertainty of the Affordable Care Act (aka Obamacare) and investors were reluctant to make a commitment. The companies facing the greatest obstacles were the insurance providers such a Humana (HUM), Aetna (AET) and United Healthcare (UNH).

But by the time it rolled out in 2013 the companies had managed to navigate and negotiate their way through the implementation and became even more profitable than before; they now seemingly have many people paying higher premiums and the back stop of the government picking the bill for a whole new group of customers.  Up until recently the stock have been among the best and steadiest performers over the last 18 months; the three stocks mentioned above gained an average of 67% during the period from January 2104 to April 2015. But they have been breaking down of late.

There have been a variety of legal and political challenges to the reverse the bill which have not gained traction. But a there Supreme court is set for another ruling in June. While I don’t think it will be overturned the uncertainty could create overhang in the near term keeping a lid on shares.

Recent earnings reports from the group were mostly met expectations but forward guidance was somewhat conservative suggesting that growth and profit margins maybe hitting a wall. The stocks, after initially responding well started to break down from their long term trend upward trends.

You can see the clean break of the uptrend in United Health (UNH) as it recently broke below both the 20 and 50 day moving averages falling as low as $112 have now climbed now that $116 level on low volume.

UNH 051315

That offered a good risk/reward entry point and The Option Wizard Portfolio recently establish a bearish position in UNH using a put spread.

But I we now how a new opportunity in to generate income through a bearish position in Humana (HUM). One hint that the companies are experiencing a slowdown was rumors on that Aetna was considering an acquisition of Humana. It suggests the companies need to grow through acquisition and increase margins through cost cutting.

The rumor caused shares of Humana to spike some 5% up to $174 shares. That places right back at the 20 and 50 day averages which should act as resistance.


HUM 051315

I don’t think the rumors play out in near term which makes and I think this spike creates a good entry point for establishing bearish position.


The Trade:

The takeover rumor has done two things; it may have put a modest floor under the share, 2) it cause implied volatility in the options to increase from 24% to 31% which is near the 52-week high.

I want to take advantage of those plumped up premiums and establish a bearish call spread for a credit.


-Sell JuneWeek2 $177.50 calls/Buy JuneWeek2 $180 calls for a $1.30 net credit

These options expire on June 13th.

It offers a great risk/reward of a potential $1.30 profit if shares are a below $177 on expiration. The maximum loss is $1.20 if shares are above $180.   That represents a potential 103% return on risk in a little under four weeks.

HUM 061215 Vertical

The position will benefit from time decay and can profit even if the shares go nowhere. Start collecting your premiums now.

About author

Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.