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UnitedHealth Options Active Ahead of Election Results

UNH bulls are flocking to short-term call options

by 11/6/2012 10:28 AM
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Insurance issues like UnitedHealth Group Inc. (NYSE:UNH - 55.05) have garnered quite a bit of attention this week, as traders place bets on the presidential election -- and, more specifically, its impact on "Obamacare." Judging by the recent action in the options pits, it looks like many speculators are expecting a near-term boost for UNH, which could imply hopes for an Obama re-election.

On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock has racked up a 10-day call/put volume ratio of 3.02, indicating that traders have bought to open more than three UNH calls for every put during the past two weeks. Furthermore, this ratio stands higher than 65% of all other readings of the past year, suggesting option buyers are scooping up bullish bets over bearish at a faster-than-usual clip.

In light of the growing appetite for calls, the security's Schaeffer's put/call open interest ratio (SOIR) stands at 0.55, indicating that calls nearly double puts among options expiring within three months. What's more, this ratio rests just 12 percentage points from a 52-week low, implying that near-term options traders have rarely been more call-heavy during the past year.

Echoing that trend, UNH saw roughly 20,000 calls change hands on Monday -- more than double the number of puts traded, and nearly three times its average single-session call activity. Most popular was the weekly 57.50-strike call, which saw about 5,300 contracts traded. The majority of the calls crossed at the ask price, and call open interest at the weekly strike soared overnight, underscoring our suspicions of buy-to-open activity.

By purchasing the calls to open, the buyers are betting on UNH to surmount the $57.50 level by Friday's close, when weekly options expire. More specifically, the volume-weighted average price (VWAP) of the calls was $0.58, meaning the buyers will reap a reward if UNH conquers the $58.08 level (strike plus average premium paid) a jump of about 5.5% from current levels -- by the end of the week. However, even if UNH remains beneath the strike, the most the buyers stand to lose is limited to the initial premium paid.

That's not to say that UNH's short-term options are cheap, though. Heading into the election, the security's Schaeffer's Volatility Index (SVI) has skyrocketed, revealing escalating demand for near-term option contracts. Now, the equity's SVI sits at a lofty 38% -- just 16 percentage points from an annual high. In other words, UNH's short-term option premiums are relatively pricey at the moment.

UNH Schaeffer's Volatility Index

Technically speaking, the shares of UNH were last seen 0.4% lower to hang out in the $55.05 region. From a longer-term perspective, the stock is struggling to stay atop its 20-week moving average, which -- along with its 10-week cohort -- has acted as a foothold since late August.


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