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Post-earnings behavior in UnitedHealth (UNH)) stock showed traders moving prices back to the floor of support near 430 before buyers came back in. This presents a unique opportunity for a bounce play for the next 90 days. So, let’s investigate how to make money using the short iron condor in options of UnitedHealth stock.
UnitedHealth stock, a member of IBD Long-Term Leaders, fell more than 22% Thursday after posting mild top- and bottom-line growth in the first quarter. The health insurance and medical data analytics giant also gave a sour outlook for the current year.
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The stock’s Relative Strength Rating nosedived to a sickly 33 on a scale of 1 to 99, according to IBD Stock Checkup. Just a week ago, UNH’s RS Rating shined at 93. However, the rating in mid-January was a very weak 28. So, the relative strength of UnitedHealth stock vs. the rest of the IBD database has fluctuated dramatically.
Interestingly, UNH did not undercut its year-to-date low of 438.50 set on Feb. 21, at least for now.
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UnitedHealth Stock: Structuring The Trade
The short iron condor trade involves selling a spread in call options while simultaneously selling a put spread. This setup essentially presents a scenario in which the investor thinks prices are most likely to stay between a specific price range.
The short iron condor requires margin, calculated by noting the distance between the long strike and the short strike. In this case, that margin number is $2,000 for each iron condor sold. Let’s consider this setup:
- Sell to open 1 UNH July 19-expiring call with a 600 strike price
- Buy to open 1 UNH July 19 620 call
- Sell to open 1 UNH July 19 430 put
- Buy to open 1 UNH July 19 410 put
Notice that UNH currently sits closer to the 410-430 put strikes than the call option strikes.
The short iron condor idea above yields the trader a credit of $6.91, based on recent trading, or $691 per set of calls and puts. This defines the maximum gain, but UnitedHealth stock must stay between 430 and 600.
The breakeven prices at expiration are 606.91 0n the upper bound (the 600-620 calls) and 425.09 on the lower bound (the 410-430 puts). If UnitedHealth stock holds between these ranges, we will leave the trade with a profit at expiration.
Risks include a margin requirement of $2,000 for each short iron condor, minus the $691 in credit collected. Thus, the trade exposes us to a potential loss of up to $1,309 if UNH expands outside our breakeven calculations.
Trade Management
Let’s identify key chart levels in UnitedHealth stock. The relative resistance zone sits right around 600. Support sits near 430.
Here are three ways to handle this trade. First, buy the short iron condor back and exit the position when it has accumulated a predefined profit for your trading style. We have 92 days of premium on our side with this kind of trade. So as long as both support and resistance hold in UnitedHealth stock, the trade premise remains valid. Consider leaving the trade with a minimum of 21 days to expiration. Why? Volatility affects option prices quite dramatically inside this three-week time frame.
Second, set price alerts for 430 and 600. If UNH breaks either of these price levels, allow three to five days for UnitedHealth stock to recover. Otherwise, exiting the trade is the most prudent move.
Finally, buy the short iron condor back when it hits a predefined stop or risk limit for your trading style. You could choose a loss percentage. Or you could also set additional alerts that are inside the boundaries mentioned above. For instance, alerts that trigger at 440 or 590 point out volatile movement that affects your profit for this trade.
Anne-Marie Baiynd is a 25-year veteran trader of stocks, options and futures and is the author of “The Trading Book: A Complete Solution to Mastering Technical Systems and Trading Psychology.” You can find her on X at @AnneMarieTrades, Sirius Business Radio, Investor’s Business Daily, the Benzinga Pro platform as well as Topstep on YouTube.
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