Trade Ideas January 14, 2020

UNH Q4 Earnings Preview / Trade Ideas

by Dan

On November 15th shares of UnitedHealthcare Group (UNH) surged 5% to a new 52-week and all-time high on news that Democratic Presidential Candidate, who at the time had a great deal of momentum, introduced a far more moderate “Medicare for All” plan than some investors had feared. From early October to late December the stock had rallied 40%, but has stalled since kissing the nice round number of $300 on Dec 20th. It is worth noting that over the last few weeks the stock has broken the steep uptrend from the Oct lows.

This stock has been volatile to say the least over the last few years, 2017 and 2018 were great years for the stock as investors saw the trump admin unfriendly to healthcare policies of the prior admin or future Dem candidates.  I can’t help but wonder given what I know for certain, that nothing in 2020 will be Certain, that the stock has possibly run too far too fast given the expected uncertainty.  The stock is now contending with its 2018 high and the strong potential of a re-test of $250ish, near its 200-day moving average on the slightest bit of disappointing news.

 

Tomorrow before the open UNH will report their Q4 results. The options market is implying about 3.5% one day move tomorrow which is actually a tad shy of its four-quarter of the average one-day post-earnings move of about 4.5%.

UNH is not exactly expensive, trading 19x 2019 eps, but it is worth noting that eps growth saw a material downshift in 2019 to 16% from 28% in 2018 and analysts expect that to continue with consensus calling for just 10% eps growth in 2020 which would place the stock at about 17.5x. Guidance for 2020 will be key, if the company is able to guide up, then the stock has the potential to be slightly re-rated higher, but my assumption is why the stock has rallied 40% since early October. On the flip side, if the company confirms consensus estimates or guides down I suspect the stock sells off a bit.

So what’s the trade?

If I were inclined to play for a miss and guide lower I might merely buy the Jan 285 put (vs stock $286.50) for $4.50, or about 1.5% of the stock price with a break-even down at $280.50, down 2%.

If I were inclined to play for a more sustained sell-off I might look to target $250 in the coming months with a put spread…

Bearish Trade Idea: UNH ($286.50) Buy March 280 – 250 put spread for $6.50

-Buy to open 1 March 280 put for 8.60

-Sell to open 1 March 250 put at $2.10

Break-even on March Expiration:

Profits of up to 23.50 between 273.50 and 25 with max gain below 25

Losses of up to 6.50 between 273.50 and 280 with max loss of 6.50 at 2.80 or higher.

Rationale: this trade idea risks 2.3% of the stock price, with a break-even down 4.5% just a little above the implied one-day post-earnings move, but allows two months for the thesis to play out.

 

BUT if you thought the company will surprise to the upside and raise 2020 guidance, then consider Buying Jan 287.50 call for $4.30, or 1.5% of the stock price which breaks even on Friday’s close at $291.80, up 2% from the current level of $286.50.

 

I’ll offer my normal disclaimer about long premium directional trade ideas into events like earnings, you need to get a lot of things right to merely break-even, first and foremost direction, then magnitude of the moving and timing. Trades like the one detailed above should be for those with a high conviction of a directional move.

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