The trend in UnitedHealth Group Inc (NYSE:UNH) stock is impressive. The daily 12-month chart and the weekly five-year chart look almost identical. This happens when management executes its plans perfectly.
Technically, the $184 level is important from the short-term perspective. If the bears manage to break it then UNH stock could fall $5 below that … but then it should encounter support. Besides, even at that lower level, the trend would still be intact and would not likely scare any bulls out of their positions. Yesterday bears tested $184 and failed. The stock bounced hard off it and left a tail below.
Click to Enlarge Since I sell put options for income, I depend on finding bullet-proof support levels. The immediate one I see for UNH is around $176, which was pivotal in June and served as a strong springboard for a 6% rally since then. The UnitedHealth chart pattern is solid gold for premium sellers. Sure it lacks pizzazz but makes up for it with consistency which I can use to generate income.
For longer-dated trades, I am willing to bet that $171 would also serve as support, since it too was pivotal but back in May. I can make the same comments for $168 then $164, etc. This is only possible thanks to the beautiful uptrend in UnitedHealth stock. This is also what I use to create income from scratch.
But first I want to verify that the fundamentals do support the trader exuberance that is currently in the stock. UNH PE is in line with the sector so there is no risk there. With a trailing PE of 24 it’s not obviously bloated in absolute terms either. Net margins are a little thin but still in line with its competitors.
There is political risk as Washington headlines are wreaking havoc with the pharma stocks, but so far UNH has shrugged most of it off.
UNH Stock Trade Idea
The Bet: Sell the UNH Dec $160 put naked and collect $1.75 to open the risk. Here I have a 90% theoretical chance of retaining the whole premium for maximum gains if the price stays above my strike. Otherwise, I must own the shares at that price and suffer losses below $158.25.
If I want smaller absolute risk to trade, I can sell a spread instead. So in addition to selling the put, I also buy another one lower. This would cap my worst-case scenario to less than the width of the spread.
The Alternate and Safer Bet: Sell the UNH Dec $160/$155 credit put spread where I have about the same odds of success but with much less money at stake. Yet if I win, the spread still delivers 13% in yield.
In either case, I would be long UNH shares for nothing out of pocket and with a 14% buffer from current price. This is much more attractive to me than risking $186 here with no room to spare.
Investing in stocks and options is risky business so I never bet more than I can afford to lose.
Learn how to generate income from options here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.
