UnitedHealth Group is holding above the 50-day moving average and has yet to really participate in the rally. If that changes, bullish option trades will do well.
Traders who are willing to bet that UNH stock will stay above the 50-day moving average for the next two weeks or so could look at a bull put spread trade.
As a reminder, a bull put spread is a defined-risk strategy: You always know the worst-case scenario in advance.
Trade Works In Multiple Scenarios
This type of trade will profit if UNH stock trades sideways or higher and even sometimes if it trades slightly lower.
With UnitedHealth trading around 549, if we use the Dec. 29 expiration, we can sell a 530 put and buy a 525 put for around $0.45.
Selling this spread would generate roughly $45 in premium with a maximum risk of $455.
If the spread expires worthless, that would be a 9.9% return in two weeks — provided UNH stock is above 150 at expiration.
The maximum loss would occur if UnitedHealth closes below 525 on Dec. 29. That would see the premium seller lose $455 on the trade.
The breakeven point for the trade is 529.55, which is calculated as 530 less the $0.45 option premium per contract.
Set Stop Loss On Option Trade
I would set a stop loss if UNH drops below 530. Otherwise, another good rule of thumb is to limit the loss to the amount of premium received. In this case, that would be $90.
Sticking to this stop-loss level will help avoid large losses if the trade goes south.
According to the IBD Stock Checkup, UNH stock is ranked No. 3 in its industry group and has a Composite Rating of 89, an EPS Rating of 91 and a Relative Strength Rating of 81.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ.
