Options Corner: UnitedHealth May Be Broken But Contrarian Traders Eyeball A Recovery

To deny that healthcare giant UnitedHealth Group Inc UNH is struggling would be to categorically ignore reality. Since the start of the year, UNH stock dropped more than 41% of market value, an ignominious decline for a blue chip. At the same time, because it's such a revered name (at least prior to the controversies), investors may be tempted to buy the dip.

Presenting a deep dive into the problems impacting UNH stock would take volumes of printed literature. In a nutshell, the sector juggernaut lost nearly $140 billion of market capitalization following a series of awful news items, including downbeat first-quarter results, CEO Andrew Witty stepping down from the helm and a potential criminal investigation by the Department of Justice.

Analysts expressed shock at the dramatic paradigm shift. "This is a stock that every growth-oriented portfolio manager in the world owned for a decade and made money on it like clockwork," said Whit Mayo from Leerink Partners. "It’s stunning. It’s unthinkable," the expert added.

Subsequently, many traders have also rushed for the exits and have largely decided to stay on the sidelines. Currently, UNH stock is trading below key moving averages — common benchmarks to gauge market health. Further, other indicators used by technical analysts, such as the Relative Strength Indicator and the Moving Average Convergence-Divergence (MACD) broadcast deflated momentum.

Still, not everything is pointed in the negative direction. Fundamentally, UnitedHealth added 700,000 new clients in the latest quarter thanks to the vertical integration of UnitedHealthcare and Optum. And while there are legitimate concerns regarding rising healthcare costs and heightened regulations, bullish investors note that UNH stock is undervalued, trading at 12.85 times forward earnings.

Buy-the-Dip Sentiments Could Potentially Boost UNH Stock

Recently, an investor wrote on the popular r/wallstreetbets subreddit that he bought $100,000 worth of UNH stock, while deceptively telling his wife that he heeded her instructions to put the money somewhere safe. While there's a cautionary tale here regarding relational integrity, the point as it relates to UnitedHealth is this: investors historically have a tendency of buying the dip in UNH.

Social media isn't the only source for this claim. Following the implosion of UNH stock that started in April and continued into this month, insiders began loading up the truck. To be fair, insider trades aren't the end-all, be-all when it comes to investing decisions. Nevertheless, there's only one reason why insiders buy their own stock: simply, they believe that shares will move higher.

Adding to the intriguing framework is market breadth data, which is the analysis of accumulation (positive sessions) and distribution (negative sessions) patterns. Currently, UNH stock is riding a "3-7-D" sequence: three up weeks, seven down weeks, with a net negative trajectory across the 10-week period. Notably, in 68.75% of cases, the following week's price action results in upside, with a median return of 2.09%.

Assuming that UNH stock closes around $297 by the end of this week, the bulls could theoretically push the price above $303 over the next week or two. Should the bulls maintain control of the market, they could drive the price toward the $308 to $310 range over the next several weeks.

An Aggressive But Rational Wager For UnitedHealth

Those willing to gamble on the potential near-term recovery of UnitedHealth may consider the 300/305 bull call spread expiring June 20. This transaction involves buying the $300 call and simultaneously selling the $305 call, for a net debit paid of $235 (the most that can be lost in the trade). Should UNH stock rise through the short strike price at expiration, the maximum reward is $265, or a payout of nearly 113%.

As a fair warning, the above trade is going to be tight because it ultimately comes down to how strong the response will be to the 3-7-D market breadth sequence. For those who want an extra time cushion, traders may consider the 300/305 bull spread for the July 3 expiration date. It's the same transaction but with an additional two weeks of margin.

Plus, the payout for the July 3 spread is quite high at nearly 105%. This defined-risk, defined-reward trade might be a more suitable idea than lying to a spouse about a six-figure investment.

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