UnitedHealth Iron Condor Could Net $200 From A Stable Stock Price

UnitedHealth Group (UNH) sitting right between the 50 and 200-day moving averages. The stock is also showing high volatility with an IV Percentile of 91% and an IV Rank of 76%

The Barchart Technical Opinion rating is a 40% Buy with a Weakest short term outlook on maintaining the current direction. 

UNH rates as a Strong Buy according to 14 analysts with 2 Moderate Buy ratings and 3 Hold ratings

UnitedHealth Group, Inc. provides a wide range of health care products and services, such as health maintenance organizations, point of service plans, preferred provider organizations and managed fee-for-service programs. UnitedHealth has the most diverse membership base within the managed-care organization market, which gives it significant competitive advantages. The company has acquired a number of competing healthcare which transformed it from a pure health insurer to a comprehensive healthcare provider. UnitedHealth reports through two segments: UnitedHealthcare and Optum. UnitedHealthcareis divided into UnitedHealthcare Employer & Individual; UnitedHealthcare Medicare & Retirement; UnitedHealthcare Community & State and UnitedHealthcare Global; providing health care benefits globally. Optum is a technology-enabled health services business serving the broad health care marketplace, including those who need care. The segment is divided into OptumHealth, OptumInsight, OptumRx and Optum eliminations.

Today, we’re going to look at an iron condor trade.

An iron condor aims to profit from a drop in implied volatility, with the stock staying within an expected range.

When implied volatility is high, the wider the expected range becomes.

The maximum profit for an iron condor is limited to the premium received while the maximum potential loss is also capped. To calculate the maximum loss, take the difference in the strike prices of the long and short options, and subtract the premium received.

UNH IRON CONDOR

UnitedHealth is sitting right between the 50 and 200-day moving averages. Traders that think the stock might stay at this level over earnings could look at an iron condor.

As a reminder, an iron condor is a combination of a bull put spread and a bear call spread.

The idea with the trade is to 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 October 21 expiry, we could sell the 460 put and buy the 450 put. That spread could be sold yesterday for around $1.00.

Then the bear call spread, which could be placed by selling the 560 call and buying the 570 call. This spread could also be sold yesterday for around $1.00.

In total, the iron condor will generate around $2.00 per contract or $200 of premium.

The profit zone ranges between 458 and 562. This can be calculated by taking the short strikes and adding or subtracting the premium received.

As both spreads are $10 wide, the maximum risk in the trade is 10 – 2.80 x 100 = $800.

Therefore, if we take the premium ($200) divided by the maximum risk ($800), this iron condor trade has the potential to return 25%.

If price action stabilizes, then iron condors will work well. However, if UNH stock makes a bigger than expected move, the trade will suffer losses.

Conclusion And Risk Management

One way to set a stop loss for an iron condor is based on the premium received. In this case, we received $200, so we could set a stop loss equal to the premium received, or a loss of around $200.

Another way to manage the trade is to set a point on the chart where the trade will be adjusted or closed. That could be around 480 on the downside and 540 on the upside.

Please remember that options are risky, and investors can lose 100% of their investment. 

This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.

*Disclaimer: On the date of publication, Gavin McMaster did not have (either directly or indirectly) any positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. Data as of after-hours, September 14, 2022.

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