UnitedHealth soared 16% following its impressive earnings beat a week ago, even amidst the fallout from the cyberattack on its subsidiary, Change Healthcare. However, with broader market indicators showing signs of weakness, UNH is starting to reveal cracks – and the once-strong rally appears to be losing steam.
To confirm a bearish bias on UNH, two technical indicators can be analyzed. The Relative Strength Index (RSI) gauges the strength of the trend as a stock climbs. The RSI is starting to curve downwards, signaling a loss of upward momentum. Additionally, the Directional Movement Index (DMI) indicates a possible change in the current trend as the DI+ (green line) is crossing below DI- (red line). The blue line (ADX) has also been dropping consistently as UNH was going up, indicating that the current rally may not be sustainable.
Trade Setup: Bear Put Spread
The trade structure being used to capitalize on a potential bearish trend on UNH is a “bear put spread.” At the time of writing, UNH was trading at $491. The bear put spread involves buying a $495 put and selling a $490 put as a single unit. This trade type can typically be found on most trading platforms and can be automatically constructed. The goal is to ensure that the right strikes and expiration dates are selected to optimize gains and mitigate losses effectively.
The exact trade setup for the bear put spread on UNH is as follows:
– Buy $495 put, May 10 expiry
– Sell $490 put, May 10 expiry
– Cost: $2.50
By buying ATM spreads, the math becomes easier as these spreads can usually be bought for half of the width of the strikes. In this case, with a spread width of $5, the spread can be purchased for $2.50. If UNH is trading at $490 or below on the expiration date, this trade has the potential to double the initial investment, providing a 100% return on investment. However, if UNH starts moving against the trade, it is essential to close it if 50% of the investment is lost, i.e., $1.25. This risk management approach ensures that every winning trade offsets two losing trades, maintaining a positive balance.
The technical indicators and trade setup suggest a bearish bias on UnitedHealth Group Inc. (UNH). As market indicators show signs of weakness and the once-strong rally starts losing momentum, a bear put spread trade strategy can be implemented to capitalize on a potential downward trend in UNH’s stock price. It is crucial to closely monitor the trade and adhere to risk management principles to optimize gains and mitigate losses effectively.