UnitedHealth is one of the largest US companies in one of the largest sectors that pays a respectable dividend. Nevertheless, I wouldn’t buy the stock directly.
Instead, I prefer an options strategy that allows me to take long positions at a discount. Specifically, I would rather sell the June $360 puts at $10 (or better) than buy the stock right now, for several reasons.
The market is overextended:
First, stock valuations are generally quite high. Forward-looking S&P 500 price-earnings ratios may not raise alarm bells at around 21, but metrics designed to look at valuations across economic cycles, such as the Schiller CAPE ratio (cyclically adjusted P/E ratio), are approaching historic highs. JP Morgan’s long-term valuation studies show that when valuation metrics are high, subsequent 5-10 year returns tend to be below average. If this is true, investors may want to consider strategies that generate “standstill returns.”
Selling option premiums – particularly cash-protected puts – provides a way to express constructive views on quality companies while getting paid to wait for attractive entry points.
The company has turned things around…
UnitedHealth Group (UNH) is a compelling candidate for this approach. The stock’s valuation, minus the recent rally, is still reasonable, if not exactly cheap, and is well below the all-time highs of a few years ago.
The reason? UNH experienced a period of strategic missteps, largely related to cost pressures and execution problems within its Optum unit. However, the reappointment of the previous CEO has begun to restore market confidence. Early signs point to renewed operational discipline and a refocus on core competencies – integrating healthcare, insurance and analytics – creating potential for margin recovery. AI could also help speed up healthcare services, improve outcomes and reduce costs; important improvements for a managed care provider.
Insurers can benefit from AI
Structurally, the healthcare sector’s share of U.S. GDP continues to grow, driven by demographic tailwinds, advancements in medical technology, and growing demand for integrated care solutions. UNH has consistently outperformed both the broader sector and GDP growth, benefiting from its size, diversified revenue mix and strong data-driven infrastructure. These fundamentals make it well-suited for defensive bias and long-term growth, even if overall stock returns decline. Health care, like toothpaste and toilet paper, is non-discretionary, especially for an aging population.
TRADE:
- Sell the June 360 strike put for $10
- Maximum win: $10
- Breakeven: $350
- Maximum loss $350
- Mid-level trading that ties up cash/margin
Selling a cash secured put allows investors to monetize options premium while setting a disciplined entry point approximately 5% below current market prices. If the option expires worthless, the seller keeps the premium as income. If awarded, the investor will effectively buy UNH shares at a discount, reducing their cost basis compared to today’s levels.
In both scenarios, the trade reflects the “get paid to wait” philosophy: getting returns from the side business while positioning itself for long-term ownership in one of the strongest franchises in American healthcare. In this case, the yield to maturity of nearly 2.8% is about 22% on an annualized basis.
In the event that one is allocated the stock, the effective purchase price is $350/share (the put strike of $360 less the premium collected) – a level corresponding to the most recent price jump. If one is assigned, one could lower one’s basis further by consistently selling covered calls against the resulting long stock position.
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