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Wednesday, March 11, 2009

Establish UnitedHealth Group Inc Covered Calls


A new covered call position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of UnitedHealth Group Inc(UNH) covered calls.

UNH is a very large U.S. managed healthcare company. It is rated a 'Buy' by each of the investment advisory services preferred by the Covered Calls Advisor, namely Schwab Equity Ratings and MarketGrader.com. The large call option premiums now available for UNH are indicative of the present large degree of uncertainty in all managed-care companies. This uncertainty is a direct result of the Obama Administration's stated commitment to reducing healthcare costs for Americans. In this vein, it is presumed that a substantial reduction in government reimbursments to these companies are forthcoming. It is this advisor's opinion that the recent huge sell-off in this group of companies has been overdone. Although future reimbursment levels will indeed be highly scrutinized by the Federal government, the profit margins of these companies are already relatively modest. Importantly, UNH and other health insurers will likely have an expanding role in the administration's objective of expanding healthcare coverage both in terms of the number of Americans covered as well as the extent of conditions covered. This covered calls investment in UNH is similar to other recent newly established positions in the Covered Calls Advisor Portfolio (such as POT,BHP,GE,and HD) in that these are high-quality, 'foundation' companies in the sense that each is a leader in their respective industry. Their stocks are especially attractive investments now since their prices have been beaten down to excessively low valuations. For each of these companies, a strong case can be made that their stock prices are likely to double(or more) within the next two years. Consequently, they qualify as the types of companies that can be bought now and retained for writing calls each month over the next several months.

A summary of the transactions is as follows:

Established UnitedHealth Group Inc Covered Calls for Mar09:
03/10/09 Bought 300 UNH @ $18.96
03/10/09 Sold 3 UNH Mar09 $19.00 Calls @ $1.20

Absolute Return if Unchanged: +6.3%
Annualized Return If Unchanged (ARIU): +209.6%
Absolute Return if Exercised: +6.5%
Annualized Return If Exercised (ARIE): +217.0%
Downside Breakeven Price Point: $17.76
Downside Breakeven Protection: 6.3%

1 comment:

  1. Man, you got out of Humana at JUST the right time! I'm surprised to see you jump into another health insurer given their bleak outlook and even bleaker regulatory future.

    ReplyDelete