The implied volatility of the Apr 18th $230.00 Call options has increased recently to a level of 32.3 when this position was established; so the $13.39 options income per share received when this Call option was sold is a good premium to receive for this moderately in-the-money option. This implied volatility level is much higher than would be expected for a company like UnitedHealth Group, whose earnings are significantly more predictable than the average for other companies with this implied volatility level. This level is higher than normal for UNH since: (1) the next earnings report is on April 16th, just prior to the April 18th options expiration date; and (2) the recent steep decline in UNH's stock was, as expected, accompanied by an increase in implied volatility of UNH's options. It is likely that this position will be closed prior to the April 16th earnings release. An in-the-money strike was selected given the Covered Calls Advisor's current Overall Market Meter sentiment (see right sidebar) of "Slightly Bearish".
UnitedHealth Group was identified today by the Covered Calls Advisor's 'Multifactor' screener, which considers a variety of quality, value, and growth metrics. UNH was in the top 1% of all companies evaluated by this screener and was also the only company in the health care sector identified by the screen. In addition, it is also currently very highly rated by analysts:
- 26 rate it as either Buy or Outperform
- 2 rate it as Hold
- None rate it as Underperform or Sell
As detailed below, for this position there is potential for a +1.7% absolute return in 23 days (equivalent to a +27.4% annualized return-on-investment).
The transaction today was as follows:
03/27/2019 Bought 100 shares UnitedHealth Group @ $239.44
03/27/2019 Sold 1 UNH April 18, 2019 $230.00 Call option @ $13.39
Note: this was a simultaneous Buy/Write transaction.
A possible overall performance result (including commissions) would be as follows:
Covered Call Cost Basis: $22,610.62
= ($239.44 - $13.39) * 100 shares + $5.62 commission
Net Profit:
(a) Option Income: +$1,339.00
= ($13.39 * 100 shares)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If UnitedHealth Group Inc. shares are above $230.00 strike price at April 18th expiration): -$948.95
= ($230.00-$239.44) * 100 shares - $4.95 commission
Total Net Profit (If UnitedHealth Group stock price is above $230.00 strike price at Apr 18th options expiration): +$390.05
= (+$1,339.00 option income +$0.00 dividend income -$948.95 capital appreciation)
Absolute Return (If UnitedHealth Group stock price is above $230.00 strike price at Apr 18th options expiration): +1.7%
= +$390.05/$22,610.62
Annualized Return: +27.4%
= (+$390.05/$22,610.62 )*(365/23 days)
The downside 'breakeven price' at expiration is at $226.05 ($239.44 - $13.39), which is 5.6% below the current market price of $239.44.
The probability of making a profit (if held until the April 18, 2019 options expiration) for this UnitedHealth Group Inc. Covered Call position is 70.4%. This compares with a probability of profit of 50.2% for a buy-and-hold of UnitedHealth Group shares over the same time period. Using this probability of profit of 70.4%, the expected value annualized return-on-investment (if held until expiration) is +19.3% (+27.4% * 70.4%), a good risk/reward profile for this relatively conservative investment.
