UnitedHealth Group Inc (NYSE:UNH) recently reported earnings and UNH stock rallied to new highs. This morning we learned that Amazon.com, Inc. (NASDAQ:AMZN), Berkshire Hathaway Inc. (NYSE:BRK.A, NYSE:BRK.B) and JPMorgan Chase & Co. (NYSE:JPM) are teaming up to venture into the drug arena and the whole sector gets whacked again on the headline on an already market-down day.
I don’t blame investors for this reaction. AMZN has proven itself a scary competitor. They are worthy adversaries as they like to compete with ultra thin margins. This time around could be different because AMZN has partners who value margins. Plus there might not be a lot of froth to shave off the sector, so the downside for current providers is limited.
UNH stock is down 6% on the headline, but luckily for bulls, it came into this morning with a 51% 12-month record, so this dip is not a disaster. But more importantly, I bet that this won’t be the start of something more sinister than a temporary dip on the headline. This is not the retail sector ten years ago.
How to Trade UNH Stock Here
And therein lies my opportunity. I bet that the recent support will hold in UNH, or else I want to own the stock. I missed the last rally and this is my chance to participate in an instant replay.
Today’s dip is not specific to UNH stock. Walgreens Boots Alliance Inc (NASDAQ:WBA), CVS Health Corp (NYSE:CVS), and Express Scripts Holding Company (NASDAQ:ESRX) are others whose stocks are suffering this morning.
Fundamentally, UNH has a price-to-earnings ratio barely above 20, which is not expensive in absolute terms and it is in line with the sector. So there is value and that is crucial to my trading style. I like to create income from thin air. I do this by selling downside risk into what others fear, but only when I know I am not potentially buying froth. United Health stock in this bullish equity market has value I can leverage.
Technically, UNH stock has rallied far and fast, but that has been the nature of the whole market. So its exposure is not particularly out of line. Therefore, I don’t expect this dip to be the start of a severe correction.
The most recent pivot point was around $230-per-share and this morning, the bears are testing it. If that is lost, there is another zone of contention around $215. The area around $198 is the most significant zone for me as it served as a springboard for the recent 25% rally that started last October.
Expectations on Wall Street for UnitedHealth stock are high. It is trading well below the lowest of their price ranges. So I would guess that the analysts will reiterate their enthusiasm and support the stock in its time of need.
The Bet: Sell the UNH Jun $185 naked put for $1.60. This is a bullish trade where I have a 85% theoretical chance for maximum gains. Otherwise, I will own shares and accrue losses below $183.40.
Selling naked puts is daunting; those who want to mitigate that risk can sell spreads instead.
The Alternate Bet: Sell the UNH Jun $190/$185 bull put spread, where there are the same odds of winning. Then the spread would yield 12% on risk.
It is important to note that today’s trade doesn’t need a rally to profit. I simply need support for UNH stock to hold for the near-term. Time will then do the heavy lifting and premiums will expire in my favor. But just in case, I have to be ready to own the shares at that level.
Ultimately, investing in stocks is fraught with danger, so I never risk more than I am willing to lose.
Get my newsletter for free 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 as @racernic on twitter and stocktwits.