WellPoint (NYSE:WLP) is a commercial health benefits company serving more than 27 million medical members. The company is an independent licensee of Blue Cross Blue Shield, an association of independent health benefit plans, and serves program members in various states across America. The company also provides benefits as HealthLink and UniCare.
Shares of WLP soared last week after the health insurer posted solid quarterly earnings and announced a 2-for-1 stock split, for shareholders of record on May 13, 2005. WellPoint reported net income of $611 million, or $1.97 a share, compared with $295 million, or $2.08 a share, for the same period a year ago. (The number of outstanding shares increased at a higher rate than net income, which in turn made the profit per share lower.) Revenue was over $10 billion and operating revenue for the full year is expected to total about $45 billion as the combined company adds more than one million new members. Analysts say the outlook for 2006 is even better and that's probably the reason for the recent "buying spree" in the issue. Traders who agree with a bullish outlook for WLP should consider this position.
Fundamentals Chart Earnings Dates Analyst Ratings
PLAY (less conservative - bullish/credit spread):
BUY PUT MAY-115.00 WLP-QC OI=3734 ASK=$0.40
SELL PUT MAY-120.00 WLP-QD OI=1375 BID=$0.80
INITIAL "NET-CREDIT" TARGET = $0.45-$0.50
POTENTIAL PROFIT (X 5 contracts @ $0.45) = $225
MARGIN REQUIREMENT (X 5 contracts) = $2275
RETURN ON INVESTMENT (max) = 9.89%
COST BASIS = $119.55
INITIAL EXIT STRATEGY:
Once the position is open, traders should place a (contingent) order to close the short ($120.00) put options if the stock moves below $121.25. A "net-debit" order of $0.95-$1.00 to close the spread may also be appropriate for some portfolios. Future adjustments to this loss-limit/exit point will be posted in the MCM Newsletter.