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HMO's look bullish

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Stocks are rather mixed to lower and investors digest the plethora of earnings reports from this morning and will continue to do so in the coming weeks as earnings season in just getting started.

The HMO Index (HMO.X) 585.37 +3.14% leads sector gainers after component UnitedHealth Group (NYSE:UNH) $95.68 +3.43% posted stronger than expected earnings. In recent weeks, the sector has seen some distribution as the major market averages have been whollaped, but the sector looks to rebound as earning begin to be released in the sector.

UnitedHealth Group Chart - $1 box

In a market environment where many have question corporate earnings (especially accuracy), the HMO's have not been under as great of scrutiny and sector members have reported strong earnings and beat estimates the past couple of quarters. Today's better-than expected earnings has the group finding bidders.

Oxford Health Chart - $1 box

With option premiums at higher levels as depicted by the VIX, selling naked puts (don't over-leverage) in strong stocks and strong sectors is an excellent option strategy. With strong earnings still existing in UnitedHealth, shares of Oxford Health (OHP) are following UNH's move higher. OHP reports earnings on August 1 and analysts are looking for EPS of $0.70 versus year-go $0.62.

The SELLING of naked puts, could OBLIGATE the trader to take posession of the underlying stock at the stated strike. Therefor it is IMPERATIVE that the stock resemble some type of bullish technicals! The option traders that SELLS naked puts is looking to capture premiums. I like to try and "make sure" than any type of assignment of the option (me taking the stock) would have me doing so at or above a support level. As described above, the selling of an OHP $40, put, would have the trader understanding that he/she would be willing to buy the stock at $40, less the premium (approximately $2.30) at $37.30. If assigned at $40, the trader's cost basis of $37.30 is "comfortably" below support as it relates to cost basis. Only if I "wish" I had bought the stock at $40 recently does the trade make sense.

DONT'T over leverage. If you would normally only buy 100 shares of a $40 stock, then DON'T sell 10 contracts (underlying 1000 shares). That's over leveraging and should be AVOIDED when trading options.

Earlier this year I profiled a longer-term bullish trade in the OHP Aug. 35 calls (OHPGH) at $3.40 (see Jan. 10 intraday) http://members.OptionInvestor.com/archive/intraday/2002/011002_4.asp and would look to sell those for a gain either just ahead of earnings (lower tolerance for risk) or after earnings. Decent little 191% gain here going as bulls approach quarterly earnings.

Stay disciplined with your trading and don't get complacent. Constantly assess risk/reward in positions you hold and monitor your account risk.

Jeff Bailey
Senior Market Technician
Option Investor

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