UnitedHealth Group is heading into its earnings report on Tuesday with a notable trend: options prices are unusually high. Implied volatility, which reflects the cost of insuring the stock, is running at twice the realized volatility. This setup presents opportunities for traders using short premium strategies, such as selling November options to reduce the cost of longer-dated January calls by over 50%. Despite past missteps, the stock has already absorbed much of the negative sentiment. Management's earnings per share (EPS) growth target of 13% to 16% seems achievable, even though healthcare costs remain a persistent challenge.
UnitedHealth's stock has remained flat over the past five years, and 90% of its 52 million customers worldwide are in the U.S., covering about 12% to 13.5% of the U.S. population. Enrollment growth is crucial for EPS growth, but underwriting margin, the core operational profitability from managing healthcare risk, is equally important. While ACA marketplace-driven enrollment is expected to decline, commercial and Medicare segments are showing growth. Commercial fee-based enrollment grew 2.9% year-over-year, and total Medicare enrollment increased by 4.5%, suggesting UnitedHealth is gaining market share.
At 17 times forward earnings, the stock is not priced for a recovery. Options prices imply a 40% volatility for a stock that has realized 20% volatility. This elevated volatility is partly due to sharp earnings-driven moves in the past, such as a nearly 20% drop in January and a similar decline in April. The stock is currently about 12-13% below the midpoint of its two-year high and low, and it has traded lower in five of the last eight earnings reports. Current options prices suggest a 6.5% earnings move, the second-highest implied move in nearly two years.
The proposed trade involves selling the November 340/420 strangle to finance the purchase of the January 2027 400 call. This reduces the call's cost by roughly 58%. If UnitedHealth's stock finishes November between 340 and 420, both short legs expire worthless, and the January call is held for a net debit of $7.60. A rally above 420 is covered by the long 400 call, but a close below 340 means buying shares at an effective basis near $347.60.