UnitedHealth reports earnings on Friday after the closing bell. Let's look at a short-term earnings trade by creating an iron condor in UnitedHealth stock.
The megacap health insurance play has stayed within the expected range following three of the last six earnings announcements. According to options trading data, the stock might keep within a 4.1% price range, up or down.
Therefore, traders who think the stock will not move too much following this earnings report could look at an iron condor trade in UnitedHealth stock.
As a reminder, an iron condor combines a bull put spread and a bear call spread.
How To Construct The Iron Condor In UnitedHealth Stock
The idea with the trade: Profit from time decay while expecting that the stock will not move too much in either direction.
First, we take the bull put spread. Using the Oct. 14 expiry, sell the 475 weekly put option in UnitedHealth stock, and then buy the 470 put. That spread on Tuesday showed a gain of around 90 cents per contract. Then make the bear call spread, which could be placed by selling the 525 call and buying the 530 call. It would produce income of 65 cents.
In total, the iron condor would generate around $1.55 per contract or $155 of premium for a 100-stock block.
The profit zone for this trade in UnitedHealth stock ranges between 473.45 and 526.55. Calculate this by taking the short strikes and adding or subtracting the premium received. As both spreads are $5 wide, you can figure the maximum risk in the trade this way: 5 — 1.55 equals 3.45, then multiply by 100 to get $345.
Therefore, if we take the premium received ($155) divided by the maximum risk ($345), this iron condor trade has the potential to return 44.9%.
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Assignment Risk
If United Health stock stays within the expected range, then the iron condor trade will work well. However, if UNH makes a bigger than expected move, the trade will suffer a loss.
With the options expiring Friday afternoon, there is no chance for adjusting after the earnings announcement. As such the trade could be exposed to assignment risk.
According to IBD Stock Checkup, UnitedHealth stock ranks third in its group and has a Composite Rating of 93, an EPS Rating of 89 and a Relative Strength Rating of 89.
Please remember that options are risky, and investors can lose 100% of their investment.
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 Twitter at @OptiontradinIQ
