Thursday Options Update: UNH, AET, CI, HD, BAC & XLF

Includes: AET, BAC, CI, HD, UNH, XLF
by: Interactive Brokers

UnitedHealth Group, Inc. (NYSE:UNH) – UNH’s shares have taken a more than 10% decline to $20.52. Perhaps the reforms announced in President Obama’s speech on Tuesday night have begun to sink in, and the overwhelming costs of such a transition are now being reflected in today’s share price declines. The massive overhaul of the current system will take a lot of time and money (as if it grew on trees), and options trades today show investors are tuned into the news. As a sector health care has increased its presence in the make up of the S&P 500 index, currently representing 16.49%. Shares have held up well despite the gloom and doom of this recession and arguably acted in distinctly staple-like fashion. Despite the sector’s resistance to the downturn, shares of a number of health care companies are taking hits today. Traders realize that the changes may begin to squeeze health care companies either through lowered premiums or decreased subsidies from the government. Thus, a rash of put trading is evident in today’s session, with over 5,000 puts purchased at the March 19 strike price for 1.08 apiece. This trade yields a breakeven share price of $17.92, a decline from today’s price of around 12.5%. Further along, at the June 15 strike, 9,000 puts traded to the middle of the market, but we believe they have been scooped up by one investor for 1.00 per contract. Shares would need to decline by 30% in order for this trader to breakeven at $14.00. These investors are likely seeking downside protection as the wheels of change lurch into motion. Option implied volatility on UNH has surged from 48% at the beginning of the week to nearly 67% today.

Aetna, Inc. (NYSE:AET) – The diversified health care benefits company has experienced a 10.5% decline in its share price to $24.25, amid a trend seen today of declining prices for its competitors, as well. We have to assume that while shares might be down across the sector today, it appears that some investors expect finite damage leaving attractive investments after an initial slide. One options trader sold 7,000 puts at the July 17.5 strike price for a premium of 1.35. That tells us one of two things. Perhaps this investor is already short the stock and thus, would be happy to pocket the premium and have shares put to him by expiration, should shares fall below $17.50. Alternatively the investor sees little likelihood that shares will settle below the strike by expiration and is lapping up today’s higher premiums left on the table. Premiums have jumped 42% at the 17.5 strike price, and therefore this position could have been motivated purely by today’s boost to put prices as the share price falls coupled with an added gain from rising implied volatility, which today stands at 86% on the at-the-money series in March.

CIGNA, Corp. (NYSE:CI) – The investor-owned health care and benefits organization also felt the pull on its shares dropping by 8% to $16.50. CI popped onto our ‘hot by options volume’ market scanner after a number of puts traded in the March contract. At the March 12.5 strike price, 11,000 puts were sold for a premium of 36 cents apiece, while at the March 15 strike, 2,300 puts sold for 1.01 each. Option implied volatility has reached 96% today, up from yesterday’s opening volatility reading of 77%. Perhaps these investors believe that the current declines health care companies are facing today, reflect discounts taken for future profit margins which will no doubt feel a tight squeeze during the changes expected to hit the health care sector. Thus, by selling puts these traders may be implying that the overall health of the companies will not be destroyed. They are happy to have the premiums earned today, and they would be willing to have shares put to them should the price fall below the strike prices selected.

Home Depot (NYSE:HD) - More of the same for Home Depot options in a repeat of a strategy we noted in yesterday’s column. We saw August put buying financed through call sales in Wednesday’s session and today we’re seeing identical trading using May expiration options. The investor is buying the 20.0 strike puts and selling 27.5 strike calls. Shares are 2.4% higher at $20.80 today and the combination is costing the investor around 1.55 in premium to build a protective position possibly against a long stock position. Implied volatility continues to contract and has lost a further 4% to 49% today.

Bank of America (NYSE:BAC) – Investors threw out the fundamentally grim reports on the economy in which rising unemployment benefit claims jumped to a record high came a sorry second to suggestions that President Obama’s inaugural budget would create more money to throw at the banking system. Hot on the heels of receding fears that nationalization is an option, Bank of America shot up by 10% to $5.66. Options on the bank were at the top of our most active options scanner where 220,000 contracts were traded ahead of lunchtime. March puts at the 3.0 and 4.0 strike were largely ditched by investors, calls at the 6.0 and 7.0 strikes were heavily bought while the 8.0 strike seemed to mark the point where investors were more comfortable writing premium. Having said that some optimists paid a 6 cent premium for rights to buy shares at a fixed $10.00 in the bank before options expire in March. Implied volatility on the options decreased a little to stand at 150% today.

Financial Select Sector SPDR (NYSEARCA:XLF) – While the single most popular strike in the XLF was at the March 8.0 puts where midday volume topped 31,000 contracts, we note that half of those selling rights on the ETF were sold. Shares are 5% higher today across the financial spectrum with the XLF trading at $8.42. The call-to-put ratio indicates nearly two calls in play compared to bearish puts. Implied volatility has dropped again to 79% - its lowest since the end of January before leading share prices of financial companies dropped 29% through last Friday. Investors appear willing to seek profits from any rise in the underlying with premiums being paid at the 8.0, 9.0 and 10.0 strikes expiring in March. One investor appears to be looking through today’s optimism with an interesting position in the June contract in which 5,000 puts at the 7.0 strike were bought versus the sale of the same amount of calls at the 10.0 strike for a net cost of 13 cents. An evaporation of bullish sentiment would cause a widening of the spread in favor of the put buyer.