Profit from 52-Week Highs in Healthcare

The healthcare industry is a hot topic of late. Reports show that the industry is hiring, balance sheets show decent cash reserves and there is pricing power. With the aging population in the U.S., the demographics for the sector look favorable for some time. Firms in this sector will continue to benefit, no matter how the health care bill breaks down or changes. Cigna Corp. (NYSE: CI ) is one of the largest publicly-traded employee benefits organizations in the U.S. Its market cap is $11.5 billion, shares are trading near a 52-week high at $43.48 and earnings are scheduled for the week of May 2. Our outlook for healthcare is positive. For options trading investors we recommend a Buy Write (~covered call) option strategy: Buy CI shares: $43.35 Sell CI Jul 46 Calls at $1.21 With a closing price of $43.35 an investor could purchase 100 shares of CI and sell 1 Jul 46 Call at 1.21. (Remember 1 option equals 100 shares of stock). Cost basis: $43.35 x 100 shares = $4,335 – ($1.21 x 1 x 100 = $121). $4,335 – $121.00 = $4,214. This strategy allows the investor to generate income by selling the call but also limits the potential upside. As long as the stock stays below the strike price of 46 at July expiration, the investor gets to keep the $121 premium. However, if the stock at expiration is higher than strike price then the upside potential is limited. Stock price $43.35 – $1.21 = $42.14 (break even point on long stock position). $42.14 – 46 strike price = $3.86/$42.14 = 9.1%. This trade offers a maximum return of 9.1% for your money invested through July expiration. Stutland Equities is a premier futures and options trading company on the Chicago Board Options Exchange. Founded in 2005 and headquartered in Chicago, Stutland Equities specializes in volatility arbitrage across multiple asset classes.
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