Recommendation

Buy HCA June 16 2017 80 Call (HCA_170616C0008000) Below $6

Buy HCA June 16 2017 80 Put (HCA_170616P0008000) Below $12

Rationale for the trade:

HCA is the world’s largest hospital operator. Obamacare’s increased funding of Medicaid has increased HCA’s top and bottom lines significantly over the last few years. The potential for a reduction or modification of its government income stream is likely to affect the price of the stock. A straddle offers the opportunity to capitalize on either a big move up or down once the Trumpcare details are revealed and the market reacts.

Given that hospital stocks have taken a beating after the election, I see one of two scenarios playing out for HCA over the next six months: 1) The stock rallies significantly as Trumpcare isn’t anywhere as bad as anyone expected, or 2) Trumpcare is much worse than anyone imagined and the stock crashes and burns. Either way, given the six-month time frame for the option to react, and the likelihood of one of the two scenarios to play out, the odds of a successful trade – regardless of the direction of a price move – are well above average.

It’s Getting close to Show Time

I’ve been writing about the coming changes in healthcare for months sharing my concerns and delivering significant profits from the current price action in the sector. Now, the alarm bells are finally going off in the corporate offices of the healthcare sector. Indeed, it’s a sign of poor management that it took the industry a month to figure out that Obamacare was going to be altered or repealed after a Trump victory, and that the flow of government money into their coffers would likely be disrupted. Two recent articles on CNBC and the New York Times offer some general facts and opinion about how the different players in the sector are likely to be affected.

We are positioned for action

Unlike healthcare company CEOs, we’ve been prepared. Over the last month I have designed an option-based strategy using straddles – trades built on puts and calls owned simultaneously – featuring United Healthcare (UNH), Molina Healthcare (NYSE: MOH) and Gilead Sciences (NSDQ: GILD). The HCA trade described above is the fourth component of this play, rounding out the strategy. These four stocks are bellwethers in their respective areas and their prices should change significantly once the details of Trumpcare are fully revealed. Because Mr. Trump is difficult to gauge, the direction of the move is uncertain. But because straddles are composed of call options and put options, the combination offers the opportunity to make money if the underlying stock rises or falls. In order for the trade to work the move in the underlying stock has to be significant – up or down – so that the profits from the winning option side of the trade are sufficiently large to offset the cost of the losing side of the trade. Here are some further specifics:

Part I – Rationale for United Healthcare Straddle

UNH is the biggest health insurer in the world. One of its biggest business lines is in Medicare replacement policies. Potential changes in Medicare are an unknown variable in Trumpcare. Thus this stock should move significantly when details are released and the market finally decides what Trumpcare means for the company.

Buy to open United Healthcare June 2017 140 Call Option (UNH_170616C0014000) up to $16.  Bought 11/17/16 at $16; 12/9/16 closing price $23.32

Buy to open United Healthcare June 2017 140 Put Option (UNH_170616P0014000) up to $10.  Bought 11/17/16 at $5.65; 12/9/16 closing price $4.18.

Initial Straddle Value:  $21.65; 12/9/16 straddle value $27.50.

Part II – Rationale for Gilead Straddle

Gilead Sciences makes two of the highest priced stocks in the system – Hepatitis C treatments Sovaldi and Harvoni. Trump is on the record as wanting to cut drug prices. Once it becomes clear as to how that aspect of Trumpcare plays out, Gilead is likely to move. The most likely move would be to the downside. But betting on Trump being predictable could be risky, which is why I prefer the straddle trade.

Buy to open Gilead February 17, 2017 (3^rd week) $77.50 Call (GILD_170217C0007750) up to $6. Bought 11/15/16 at $1.65; 12/9/16 closing price $1.64.

Buy to open Gilead February 17, 2017 (3^rd week) $77.50 Put (GILD_170217P0007750) up to $5.  Bought 11/15/16 at $5.15; 2/9/16 closing price $6.75.

Initial Straddle Value: $7.10; Rollover value $5.15.  Straddle Value on 12/9/16 $8.39

Part III – Rationale for Molina Straddle

Molina is the leading provider of Medicaid HMO insurance plans. If Trumpcare cuts Medicaid funding significantly this stock will likely fall in a big way. If the opposite happens, the sigh of relief should deliver a major rally and the stock will likely rise in price.

Buy to Open Molina Healthcare June 16 55 Call Option (MOH_170616C0005500) up to $8. Bought 12/7/16 at $8 – 12/9/16 closing price $6.50

Buy to Open Molina Healthcare June 16 55 Call Option (MOH_170616P0005500) up to $8. Bought 12/7/16 at $7.80; 12/9/16 closing price $6.50.  I have open positions in GILD, MOH, and UNH.

All Bases are covered

A well-designed option strategy first reduces risk, and second delivers the potential for profits. These straddles provide four different risk-managed trades with the potential for significant profits once the underlying stocks move.

New Positions/Updates

Rollins Inc. (ROL) – HOLD. Bought 2/22/16 at $27.38.  12/9/16 closing price $33.94. Sell Stop to $31.  I own shares in ROL.