Options Traders Strike as UnitedHealth Breaks Out

Karee Venema

UnitedHealth Group Inc (NYSE:UNH) is the best Dow stock today, up 5.4% at $260.75, on news the Trump administration withdrew a plan to end rebates paid to insurance companies by drug manufacturers. This upside move has sparked a rush of activity in UNH's options pits, with most of the action occurring on the call side.

At last check, around 31,500 calls and 18,000 puts have changed hands -- four times what's typically seen at this point, and total options volume pacing in the elevated 98th annual percentile. The weekly 7/12 260- and 262.50-strike calls have seen the most action. While new positions are being initiated here, it's not clear if they're being bought or sold.

Further down the list is the July 260 call, where it looks like speculators may be buying to open the front-month strike for a volume-weighted average price of $4.55. If this is the case, breakeven for the call buyers at next Friday's close, when the series expires, is $264.55 (strike plus premium paid).

This time frame includes UnitedHealth's earnings report, due ahead of the open next Thursday, July 18. UNH stock has a history of positive earnings reactions, closing higher in the subsequent session in six of the past eight quarters. On average, the shares have moved 3.3% the day after earnings over the last two years, regardless of direction, slimmer than the 4.1% swing the options market is pricing in this time around.

Looking closer at the charts, UNH stock has been making a beeline north since bottoming at an 18-month low of $208.07 on April 17. Helping the shares has been a trendline connecting higher lows since early May -- which currently coincides with the equity's 40-day moving average.

Pullbacks to this trendline have had historically bullish implications for UnitedHealth. Per data from Schaeffer's Senior Quantitative Analyst Rocky White, the shares have averaged a 3.2% one-month gain and 80% win rate following the last 10 times they've tested support here after a lengthy stretch above it. However, since UNH stock bounced off its 40-day trendline on Tuesday, it's already added 6.9%, and is on track to close above its 200-day moving average for the first time since late February.

unh stock daily price chart on july 11