Options Traders Aren't Sold On this Potential Tax Reform Winner

HCA shares were overbought coming into today

Dec 1, 2017 at 11:24 AM
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Hospital operator HCA Healthcare Inc (NYSE:HCA) has overcome previous resistance in the $80-$82 region, taking back the 200-day moving average in the process, after J.P. Morgan Securities yesterday issued an extremely bullish note. Analysts there upgraded HCA stock to "overweight" from "neutral," upping their price target to $96 from $75, saying the passage of Republicans' tax proposal would "disproportionately benefit HCA" and lift the company's earnings per share for 2019 by roughly 30%. However, the status of the tax bill remains uncertain.

hca stock

However, Leerink this morning dropped its price target for HCA to $95 from $100, and the shares are down 1.7% at $83.58 as a result. But the equity may have been due for a pullback anyway, since the recent run up the charts put its 14-day Relative Strength Index (RSI) at 74 at last night's close, in overbought territory. For the year, the security has added 13.1%, and is now close to filling its late-July bear gap.

In the options pits, traders have been taking a bearish stance. The stock has a 10-day put/call volume ratio of 3.91 at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). Not only does this show put buying has almost quadrupled call buying in recent weeks, but the ratio ranks in the 74th annual percentile, showing such a preference for puts over calls is unusual. It's also worth noting put open interest is now at a 52-week peak.

During this time frame, the March 85 strike saw the largest increase in put open interest, with 5,400 contracts added. It's not clear how traders positioned themselves here -- and some of the action may be tied to stock, according to Trade-Alert -- but anyone buying to open the contract is betting on HCA stock falling further below $85 in the months ahead. This March series has historically been a favorite among HCA speculators, as heavy open interest also sits at the 70-and 72.50-strike puts in the same series.

On the other hand, analysts are mostly bullish. There are 19 brokerage firms tracking the security, 12 of which say it's a "strong buy," with no "sell" ratings to be found. Moreover, the average 12-month price target stands overhead at $87.81.


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