This week I’ll talk about restructuring the portfolio by using option strategies for healthcare stocks where I expect rising volatility. This strategy has been successful several times recently: our 700%+ options gain with McKesson, the recent 53% gain on Texas Instruments options, the recent 22% gain on shares of Opko Health and the recently open, but already highly profitable, United Healthcare option straddle trade that has yielded 39% since Nov. 17 ^.

The big picture theme for the foreseeable future is Trump, the political changes around the world and the market’s volatility.  Already his style of governing has been foreshadowed by his deal with Carrier in Indiana, his Tweetstorms, and his threats to companies that want to leave the U.S.So it’s reasonable to expect that the world and Wall Street will become an even more unpredictable place.  The bright side is that unpredictability creates opportunity, and to harvest this opportunity I will become even more focused on short-term price movements and technical analysis.

Consider the following:

United Healthcare is in the Saddle

United Healthcare (NYSE: UNH) June 2017 Straddle

Buy to open United Healthcare June 2017 140 Call Option (UNH_061617C140) up to $16.  Bought 11/17/16 at $16 – 12/2/16 closing price $25.60

Buy to open United Healthcare June 2017 140 Put Option (UNH_061617P140) up to $10.  Bought 11/17/16 at $5.65 – 12/25/16 closing price $4.62.

Initial Straddle Value:  $21.65.  12/2/16 straddle value $30.22.

Rationale for the trade:

Trumpcare is coming.  And as I wrote in “Insurer’s Secret Weapon,”  it looks as if the biggest beneficiaries from Trumpcare in the healthcare sector are going to be the insurance companies like United Healthcare, the largest health insurer in the U.S. 

And since nothing is ever certain, that’s why I recommended a United Healthcare (UNH) June 2016 140 straddle on Nov. 17, with a purchase value of $21.65. The straddle, which has both a call and a put, has a great chance of delivering a profit before expiration if the stock moves, up or down. So far, the stock has moved higher. As a result, the straddle was worth over $30 – a 39% gain in three weeks.

Gilead Sciences Straddle Ready to Move

Buy to open Gilead February 17, 2017 (3^rd week) $77.50 Call (GILD_021717C77.50) up to $6. Bought 11/15/16 at $1.65.  12/2/16 closing price $1.69.

Buy to open Gilead February 17, 2017 (3^rd week) $77.50 Put (GILD_021717P77.50) up to $5.  Bought 11/15/16 at $5.15. 12/2/16 closing price $5.02.

Initial Straddle Value: $7.10.  Roll over value $5.15.  Straddle Value on 12/2/16 $6.71

Rationale for the trade:

Shares of Gilead Sciences (NSDQ: GILD) are starting to show some weakness. Thus, our Gilead February 2017 straddle may be ready to deliver. Straddles work only if the stock moves up or down, decisively.  If I’m right, Gilead, whose revenue from its Hepatitis C drugs, Harvoni and Sovaldi, is starting to shrink, will start to fall as investors begin to fret about the uncertainty for profits that is likely when insurance companies tighten their purse strings in response to Trumpcare.   If Gilead drops below $70, before expiration this could be a very profitable trade.  

Set Sell Stop of $16 on Airgain after 60% Profits Taken

Rationale for implementing the Sell Stop:  I want to preserve profits on the remaining portion of this position.

Shares of Airgain (NSDQ: AIRG), a leading manufacturer and designer of premium embedded antennas for wireless communications devices, have given back a fair amount of their recent gains. We took profits on 50% of the position when the shares had gained 60% after the company’s most recent earnings report. But the action in the market could take the shares down further.  So it’s time to lock in remaining profits with a sell stop.  If the shares are stopped out, we would still have a potential 36% profit in less than two months. 

Why we Sold DBD and Ambarella

It’s simple. We sold Diebold and Ambarella last week because the two stocks were just not delivering the goods. I was especially concerned about Diebold Nixdorf (NYSE: DBD) shares ahead of Italy’s referendum due to the increased potential risk to companies doing business in the Eurozone as investors begin to factor in the “No” vote. I still like the company’s prospects for the long term but in the short term the risks outweigh the benefits.  It does make sense to keep the DBD February options straddle in place as it could still let us participate in any significant move, up or down in the shares. 

Ambarella’s most recent earnings beat expectations but a big miss on its guidance seems to have exhausted investor’s patience. In fact Ambarella reported its first quarter ever of decreasing sales. Anytime a high flying growth company starts to stumble on its sales you have to wonder about its ability to stay afloat without some type of significant restructuring.  The drubbing suffered by the shares on Friday was also suggestive of more trouble. 

Portfolio Update

New Positions/Updates

New – Sell Stop $16. Airgain (Nasdaq: AIRG) Buy up to $17.  Recommended 10/20/16.  Bought 10/20/16 at $14.15. 12/2/16 close $17.96.  Dr. Duarte owns shares in AIRG.  Profits on 50% of position taken on 11/15/16 at 22.69 or so.

SOLD – Ambarella (NSDQ: AMBA) – Bought 6/16/16 at $52.77.  Sold 12/2/16 at $54.47.  Return 3.22%. 

Sold Diebold Inc. (NYSE: DBD). Buy up to $32.  Recommended 8/18/2016.  Bought 8/18/2016 at $28.18.   Sold 12/2/2016 at $22.30. Return (-) 20.54%.

Stocks

New – Sell Stop $16. Airgain (Nasdaq: AIRG) Buy up to $17.  Recommended 10/20/16.  Bought 10/20/16 at $14.15. 12/2/16 close $17.96.  Dr. Duarte owns shares in AIRG.  Profits on 50% of position taken on 11/15/16 at 22.69 or so.