Seeking Alpha
, Twitter (2 clicks)
Long/short equity, research analyst, gaming, restaurants
Profile| Send Message|
( followers)  

On May 7, 2012, CNBC published a brief article, "US Supreme Court Ruling Key to Cigna Trade". In June, the Supreme Court will make a ruling on the constitutionally of the Affordable Health Care Act. The Supreme Court is divided 5-4, with five of the justices appointed by Republicans, and four appointed by the Democrats. This 5-4 Supreme Court margin could play a big difference in the legalities in the Affordable Health Care Act and this could have an effect on CIGNA Corporation's (NYSE:CI) stock price.

Cigna can be described as a holding company that specializes in managing health plans for companies that self-insure. Cigna is broken up into five major business segments that are Health Care, Disability and Life, International, Run-off Reinsurance and Other Operations. About two-thirds of Cigna's revenue comes from the Health Care Segment that entails HMOs PPOs, dental and prescription drug plans.

Over the last couple of years Cigna, UnitedHealth Group (NYSE:UNH), Aetna (NYSE:AET) and WellPoint (NYSE:WLP) have made many changes over the years to comply with the Affordable Health Care Act. One of Cigna's many challenges is how Cigna will sell insurance in health care exchanges in 2014, since people are going to have more choices in being able to obtain health insurance.

There is also the possibility of Cigna losing consumers and what the effects will be on Cigna's risk pool, since the possibility could increase for higher-risk candidates being taken on. The health care exchanges will also vary from state to state since some states may operate multiple exchanges.

To combat competition, Cigna, in January 2012, made the acquisition of HealthSpring that added 345,000 Medicare Advantage and 850,000 Medicare part D drug plan members. Earlier, in May, Cigna agreed to acquire American Financial Group's Medical supplement and critical illness business for #295 million that will allow Cigna to gain market share in the individual and senior health markets.

Aside from the Supreme Court ruling coming in June 2012, Cigna's stock has lately been on a slide since its year-to-date high of $49.02 on April 4, 2012. Cigna's last earnings release was on May 3, 2012 and the company reported lower-than-expected profit, but raised 2012 earnings forecast. Cigna's profit was impacted by its recent acquisitions and litigation matters, and when taking out these special one-time items, Cigna's earnings were generally in-line with management's expectations at $1.28, despite falling two cents short of analysis expectations.

Chart forCigna Corp.

The upcoming Supreme Court decision on the Affordable Health Care Act in June could affect Cigna, and one way to trade Cigna's upcoming volatility is using a non-directional strategy. For further information on previous non-directional strategies please click here and here. Non-directional strategies are generally used for earnings, since earnings can provide a volatility boost to the upside or downside. This upside or downside boost could make non-directional strategies profitable when playing both sides of the fence. Aside from earnings, legal cases, medical drug trials and other pending news in stocks can provide exciting opportunities for non-directional strategies.

Trade Idea: Buy July 44/45 Strangle

Buy (1) July 45 call for 2.02 (2.02 x 100 = $202)

Buy (1) July 44 put for 1.99 (1.99 x 100 = $199)

Total Cost = $401

Upper Breakeven Point = Upper Breakeven Point = Strike Price of Long Call + Net Premium Paid =$47.02

Lower Breakeven Point = Lower Breakeven Point = Strike Price of Long Put - Net Premium Paid =$42.01

At the current stock price of $44.50, this represents about a 5.6% move in either direction to be profitable.

With the declining markets, upcoming Supreme Court decision and a stock (Cigna) that has fallen over 9% since April, using a non-directional strategy could be a safer way to go, rather than using a directional strategy. Overall, health insurance is something everybody needs regardless of whether people want insurance - and health care providers are poised to benefit from changes in health care regulation. In the short term, there could be some volatility in the health care sector, and using a non-directional in these rocky markets can be profitable if deployed correctly.

Source: Will The Upcoming Supreme Court Decision On The Affordable Health Care Act Affect Cigna?

Additional disclosure: May consider a July Strangle in CI.