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Option traders are bombarding Humana Inc. (NYSE:HUM - 71.93), which -- along with its fellow health insurers -- is swimming in red ink. So far, HUM has already seen roughly 5,000 calls and 2,200 puts change hands, far surpassing its average intraday volume of fewer than 700 calls and 400 puts.
Digging deeper, it appears much of the action is of the sell-to-open variety, with speculators gambling on both support and resistance for HUM. On the call side, the stock's April 75 strike has seen nearly 1,700 contracts cross the tape on open interest of zero contracts, pointing to a slew of fresh initiations. Furthermore, a healthy portion of the calls have traded at the bid price, suggesting they were sold.
By writing the calls to open, the sellers expect HUM to remain south of $75 through the next couple of months. In this best-case scenario, the calls will expire worthless, allowing the traders to pocket the initial premium received from the sale -- a volume-weighted average price (VWAP) of $1.28. On the flip side, the sellers could be obligated to sell HUM shares at $75 a pop -- a discount to Street value -- should the stock rebound and the options move into the money.
Meanwhile, the March 67.50 put is the most popular of its kind, with roughly 900 contracts traded on open interest of fewer than 77 contracts, once again hinting at new positions. Plus, three-quarters of the puts have crossed at the bid price -- a VWAP of $0.98. Should these puts remain out of the money through expiration on Friday, March 15, the sellers can retain the entire net credit. But, if HUM should extend today's retreat and breach the $67.50 level, the traders could be on the hook to buy the shares at $67.50 apiece, representing a premium to what they'd pay on the Street.
After falling as low as $69.78, the shares of HUM have pared their deficit to 7.8%, and were last seen lingering in the $71.93 vicinity. The security is now in danger of ending south of its 10-day and 20-day moving averages for the first time since early January.
Pressuring the stock, as well as its sector peers, was a government proposal for 2014 Medicare Advantage rates that came in worse than expected. The news could put HUM at risk for some bearish brokerage attention, with 15 out of 21 analysts offering up "buy" or better endorsements, and not one "sell" or worse suggestion in sight.