By Jud Pyle, CFA, chief investment strategist for the Options News Network
HMO stocks were hit hard this morning after
to "underperform" from "perform," boosting July put options volume across the entire sector. Bearish put buying activity spiked in
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.
ONN.tv has pointed out frequently in the last few weeks that the bullish case for health care-related stocks is that fears about the effects of the Obama administration on company profits could be overblown. Today the bearish case is ruling the day. Bullish investors can use this increase in put premiums to establish short put positions if they choose to bet against today's prevailing trend.
Jud Pyle is the chief investment strategist for Options News Network (www.ONN.tv) and the portfolio manager of TheStreet.com Options Alerts. Click here for a free trial for Options Alerts. Mr. Pyle writes regularly about options investing for TheStreet.com.
Jud Pyle, CFA, is the chief investment strategist for Options News Network. Pyle started his career in finance in 1994 as a derivative analyst with SBC Warburg. After four years with Warburg, Pyle joined PEAK6 Investments, L.P., in 1998 as an equity options trader and as chief risk officer. A native of Minneapolis, Pyle received his bachelor's degree in economics and history from Colgate University in 1994. As a trader, Pyle traded on average over 5,000 contracts per day, and over 1.2 million contracts per year. He also built the stock group for all PEAK6 Investments, L.P. hedging, which currently trades on average over 5 million shares per day, and over 1 billion shares per year. Further, from 2004-06, he managed the trading and risk management for PEAK6 Investments L.P.'s lead market-maker operation on the former PCX exchange, which traded more than 10,000 contracts per day. Pyle is the "Mad About Options" resident expert. He is also a regular contributor to "Options Physics."