Thursday, December 28, 2006

Has The UNH Scandal Been Priced In To The Stock?

I have to admit that I'm no fan whatsoever of health insurers especially giant and unethical ones. Having said my purely subjective and baseless comments, I paradoxically give you my objective viewpoints about how I might possibly play UNH on another longer term option play.

1. Fundamentals (Jim Cramer of "Mad Money" calls these the fundies-which I like). Their founder has recently resigned and according to this report SEC Inquiry of UnitedHealth Becomes Formal Investigation he's adjusted his options to reflect the highest stock price during the 1997-2002 period (what a charitable guy-always looking out for the stockholder's value).

UNH has already told investors that they will take greater charges than previously predicted. I think that given all of these events, investors can now look forward to more price gauging and exploiting the human need for healthcare (sorry about the extra editorial but I had to throw that in there to remind you all that I don't fall in love with stocks or companies I trade).

2. Technicals. The chart below shows that the stock has endured plenty of selling pressure and is starting to find an uptrend. It seems to be consolidating here between the $52-54 range.

3. Option Pricing-Since UNH is not what a trader would consider a "fast mover", the Jun 07 50 or 55 Calls should give us plenty of time for it to make its gradual move higher. If you are a little more bullish on 07 for UNH and think that the breakout above the 54 level will occur soon than the 55 Calls would be your flavor.

4. Premium-Right now the Jun 07 50 Calls are trading at a fair theoretical value and the Jun 07 55 Calls are actually trading a little under FTV. Current premiums are $6.60 and $3.50 respectively.

5. Implied Volatility (IV)- IV on the above referenced calls are about 25 and 23% respectively which in accordance with the Ivolatility chart below is near 52 week lows and has potential of rising.

6. Risks-Given that the markets have had a phenomenal run and appear to finish strong for the year, UNH has also participated in this run since November even after the Democrats took control of the Congress. Shorter term downside risk would be a drop below $50 with intermediate to long term damage being done below $46.

7. Entry point-I'm planning on waiting after the new year to see what the first week of regular volume level trading will bring to the overall markets. Again, I'd like to see a breakout above 54 with above average volume before I pull the trigger but I'll post my entry decision at any rate.

Alright. That's my take on this play, grab a "vine" and feel free to tell me I'm "bananas" (excuse the Jungle puns but it makes life a little more interesting) or if you can vouch for my idea or if you have any questions.

"Swing" on by and post a comment.

Look for my other healthcare play coming next.

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