Options: Bears Creeping in Health Care

By Jud Pyle, CFA, chief investment strategist for the Options News Network

HMO stocks were hit hard this morning after Oppenheimer downgraded UnitedHealth(UNH Quote) to "underperform" from "perform," boosting July put options volume across the entire sector. Bearish put buying activity spiked in Humana(HUM Quote), Cigna(CI Quote) and WellPoint(WLP Quote) while investors anticipate a new health care reform policy from the Obama administration.

Looking at the Humana July 30 puts, more than 3,200 contracts changed hands with the stock down to $29.02. An investor bought the puts at around $2.60 per contract vs. current open interest of 549. The stock has rallied back into positive territory as of this writing, but the puts are still up on the day, illustrating how today's buying activity has spiked implied volatility.

We have also seen put buyers in Cigna hit the tape today. An investor bought about 3,100 July 22.5 puts at around $3.20 per contract with the stock at $20.24. This investor needs Cigna shares to expire below $19.30 at July expiration (the strike price minus the premium). These puts are currently home to open interest of just 687 contracts. Cigna did not release any significant news today, but yesterday an analyst said the company could rake in $1.3 billion by potentially selling its pharmacy benefit management unit to Medco Health Solutions.

Lastly, taking a look at WellPoint July 45 puts, which traded about 4,000 times so far today after an investor paid about $2.75 per contract with the stock around $45.47. This is another example of a rise in implied volatility, as the stock has rallied and is now only down 14 cents to $45.90, but the puts are up more than that decline, moving from $2.25 to $2.40 on the day. An interesting thing to note is Oppenheimer called WellPoint a "far more attractive" opportunity in the health care sector than United Health.