UnitedHealth Group has been struggling in recent months and recently failed to break above the 50-day moving average. Therefore, a calendar spread trade in UNH stock may take advantage of both this price action and the volatility skew around this Friday's earnings report.
This trade will also perform well if UnitedHealth experiences a slight pullback.
Defined-Risk Trade
I'm thinking UNH stock might pull back to 450 this week. So, let's look at a bearish calendar at that strike price.
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A calendar spread trade involves selling a short-term option and buying a longer-term option with the same strike price.
Traders typically use call options unless the trade has a bearish bias, in which case they would use puts.
Based on Friday's trading in UNH stock, traders could sell the July 21-expiration 450 strike put for around $5.20, then buy the Aug. 18 450 strike put for around $9.25.
UNH Stock Today: The Calendar Spread Setup
That results in a net cost for the trade of $4.05 per spread — the most the trade in UNH stock can lose.
The estimated maximum profit is around $800, but that could vary depending on changes in implied volatility.
The idea with the trade: If UNH stock trades down around 450 after Friday's earnings, the calendar spread will increase in value. This allows the trade to be closed for a profit.
The position starts with a delta of -5, meaning the exposure is roughly equivalent to being short 5 shares of UnitedHealth shares, although this will change as the trade progresses.
The break-even prices are estimated at around 430 and 475 for UNH stock.
Weak RS Rating
According to IBD Stock Checkup, UNH stock ranks No. 3 in its group. It has a Composite Rating of 56, an EPS Rating of 94 and a Relative Strength Rating of 23.
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
