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Health-care stocks rally: Trader has a way to play boom

Health care stocks rally: Trader has a way to play boom

Health-care stocks have outperformed in the past three months, and there could be more upside to come.

Todd Gordon, managing director of Ascent Wealth Partners, says the conditions are ripe for the group to continue leading.

"Long-term we're bullish on the sector as the demographics in the U.S. are aging and this will allow health insurers to demand higher premiums," Gordon told CNBC's "Trading Nation" on Thursday. "In light of everything that's happened with Covid-19 almost pushing the economy into depression, there's obviously going to be a greater focus on health care going forward."

Gordon says the technical set-up also looks supportive — the XLV health-care sector ETF has seen a V-shaped rebound after the sell-off as it makes its way back to highs.

"One name I mentioned that we do like is United Healthcare for the fundamental reasons. From the technical point of view, you can see that the breakout that you may have identified on the XLV has occurred here, and you see that the series of highs right around the $300 to $305 mark have been exceeded," said Gordon. "We are now on breakout watch. We like the stock higher."

"If you're an options trader, one way you can do this is buying a deep-in-the-money call option — it sort of serves as a stock replacement strategy," Gordon said. 

He is buying the 280 strike call with Sept. 18 expiration. This call has Delta 70 — this means that if the stock rises by $1, the value of the option will increase by 70 cents.

"They're quoting us right now at about $38 to buy the September 280 strike call. That's $3,800 that you'll have to put out there to get a hold of this 100 shares for the 114 days. Compare that to 100 shares at current prices, $30,000, so a little less than one-tenth the amount of capital outlay," said Gordon. 

Disclosure: Ascent Wealth Partners holds UNH.