UnitedHealth Group is showing strong relative strength and is above the 21- and 50-day moving averages. The stock is also forming a cup-with-handle base with a 553.23 buy point.
A few weeks ago, we looked at an unbalanced iron condor on Tesla, and that trade has performed very well. Today, we're looking at a similar idea on UNH stock.
Instead of a standard neutral trade, we will structure the condor with a slight bullish bias. This can be achieved by using a wider put spread than the call spread.
Trade Combines Bull Put, Bear Call Spreads
As a reminder, an iron condor is a combination of a bull put spread and a bear call spread.
First, we take the bull put spread. Using the Nov. 18 expiry, we could sell the 510 put and buy the 500 put. That spread could be sold yesterday for around $1.35 per share.
Then we set up the bear call spread, which could be placed by selling the 585 call and buying the 590 call. This spread could be sold Wednesday for around $0.65.
Notice that the put spread is 10 points wide and the call spread is only five points wide. This gives the trade a slight bullish bias, but also more risk on the downside.
In total, the iron condor will generate around $2, or $200 of premium for a block of shares.
The profit zone ranges between 508 and 587. This can be calculated by taking the short strikes and adding or subtracting the premium received.
Maximum Potential Return 25% On UNH Stock
The maximum risk is $800 on the put side and $300 on the call side.
If we take the premium ($200) divided by the maximum risk ($800), this iron condor trade has the potential to return 25%.
A stop loss in this case might be calculated based on 25% of capital at risk, so a loss of around $200.
UNH stock is ranked No. 1 in its industry group and has a Composite Rating of 97, an EPS Rating of 94 and a Relative Strength Rating of 89.
UnitedHealth has already reported Q3 earnings, so this trade would have no earnings risk.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
