Options traders are heavily trading this health stock ahead of a big conference this week

Published Mon, Mar 11 202410:57 AM EDT

We'll look at a health insurer stock with an interesting set-up heading into a big industry conference this week and break down various options trades being applied on it. Centene (CNC) traded nearly 9 times the average daily call volume on Friday ahead of Barclays 26th annual Global Healthcare Conference this week. The shares are up more than 27% off the early September lows. Most active were the March 22nd weekly $82 calls and the March 28th weekly $82 calls. These traded as a package, and prices suggest the trader purchased the longer dated March 28th calls for $1.20/contract to sell the March 22nd weeklies at $.35/contract. Both sides of the trade represent new opening interest. Bernstein recently reiterated with an outperform rating and a $100 price target. Traders initiate a long calendar spread seeking to profit from the "theta" or "decay" of the nearer dated option to help finance the purchase of a longer dated one. Often the trade is initiated with a specific catalyst in mind, such as the release of quarterly financial results. Centene reported earnings most recently on February 6th. Their next quarterly earnings release will take place on April 26th and the company will be hosting a conference call pre-open that morning to review the results. Breaking down Centene set-up Centene is health insurance provider serving over 27 million people, primarily offering plans under contract with state Medicaid programs, which represents 65% of the company's revenue, and Medicare, which represents 15% of revenues. Revenues have doubled over the past 5 years. Net income (reflected below) is pretty lumpy from quarter to quarter, but underneath that it has grown over the same period by about 93% from $1.65 billion in 2019 to $3.1 billion last year. Trading at less than 13 times trailing 12-month earnings, CNC looks cheap, but is it? Historically, despite meaningful growth, the company has traded at an average of 15.7 times earnings, considerably cheaper than managed care companies like UnitedHealth. As previously mentioned, the company derives most of its revenues from state Medicaid contracts, and it lost one recently in Texas. Cowen said recently that the loss of 66% of the Texas Medicaid enrollment is "possibly indicative of waning political access." This concern may now be weighing on the stock as investors contemplate whether they could lose contracts in Florida and Georgia. Florida's announcement is expected on March 25th, and this is likely the catalyst that the options trader is targeting. CNC 1Y mountain Centene, 1-year I generally like calendar spreads into catalysts, however the price of this one, at least as/of Friday's close, was not particularly compelling. The mid price on the March 28th weekly $82 calls was nearly $2, substantially higher than the trader who initiated the block paid, and the weekly March 22nd calls would collect less than a quarter. That's pretty anemic. The trades on Centene So if the calendar trade won't work, what's an investor to do if they also want to play the catalyst? An important note, when initiating at or slightly out of the money vertical "debit" spreads, where one is purchasing the spread, I prefer to look for payoffs of about three-to-one, where the potential profits are three times the cost of initiating the trade. This is because the probability of profit is reduced by the fact that we need the stock to move through the strike we've chosen by at least the premium spent. If the bet is less than 50/50, than the payoff must be better than one-to-one. So what to do? Well that depends. If one owns the stock, a hedge might make sense, such as a weekly at-the-money put spread as illustrated below. The stock does look cheap, but if they lose contracts in Florida and Georgia considerably less so. The hedge trade : Sell March 22 $82 call Buy March 28 $82 call Alternatively, to target an upside surprise, particularly if you don't already own the stock, why not use a vertical call spread such as the March 28th weekly $80/$86 as illustrated below? Vertical call spread trade : Buy March 28 $80 call Sell March 28 $86 call Whether one chooses to make a directional bet in Centene going into the anticipated announcement or not though, be sure to use limit orders when trading options. Start at a conservative price and "walk" your limit order up or down in increments. When spreads are wide trade between the bid/ask spreads or not at all. DISCLOSURES: (None) THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . 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