Monday, November 24, 2008

Establish Humana Covered Calls

A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of Humana Inc (HUM):

Humana is a managed healthcare company with nationwide coverage. Its large exposure to government-sponsored programs (primarily medicare) has been a major headwind for its share price because of fears that the Obama administration will accelerate efforts to shrink healthcare costs (and therefore profits for companies like HUM). I believe the punishment the stock has taken over this concern is overdone and that initially, healthcare policy changes will be focused moreso on expanding coverage for the uninsured. A second reason the company's stock has taken a beating this year is because of the earnings misses that resulted directly from the advent of the Medicare Prescription program this year and the Humana's underestimates of prescription reimbursment costs they would incur this year -- this problem will be corrected with the experience gained from reimbursment levels so far this year and the opportunity to revise pricing to profitable levels which will become effective in January 2009. Next year, earnings should increase about 30% above this year's result; and with a currently depressed P/E of only 6, a P/Sales of only 0.2, and a strong cash flow, there is a lot of room for a nice price recovery if my thesis as described above is anywhere close to being accurate.


Established Humana Inc (HUM) Covered Calls for Dec08:
11/24/08 Bought 1000 HUM @ $25.55
11/24/08 Sold 10 HUM Dec08 $25.00 Calls @ $2.90

Annualized Return If Exercised (ARIE): +129.0%
Downside Breakeven Protection: 11.4%

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