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.
A summary of the transactions is as follows:
Established UnitedHealth Group Inc Covered Calls for Mar09:
09/23/09 Bought 400 UNH @ $27.05
09/23/09 Sold 4 UNH Oct09 $26.00 Calls @ $1.95
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. 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.
Below is the Covered Calls Advisor's 'Buy Alerts' spreadsheet for UNH. It scored above the Buy threshold of 20.0 with a Total Points rating of 20.55. At its current price of $27.05, UNH provides a reasonable entry point for this value-oriented investor. Nevertheless, because of the uncertainty over the current government debate on healthcare reform, a conservative in-the-money covered calls position was established.
Note: For expanded view, left click on the spreadsheet above.
Some potential results from this transaction are:
Absolute Return if Exercised at $25.00: +3.3%
= [$1.95 - ($27.05 - $26.00)]/$27.05
Annualized Return if Exercised(ARIE): +50.6%
= [$1.95 - ($27.05 - $26.00)]/(365/24 days)
Downside Breakeven Price Point: $25.10
Downside Breakeven Protection: 7.2%
This in-the-money position also provides up to 3.9% [($27.05-$26.00)/$27.05] downside protection available while still achieving the maximum potential annualized return-on-investment of 50.6% from this covered calls position.