To Err Is Humana

Last Friday, in another memorable edition of the cable news sensation known simply as "Options Action," Mike Khouw of Cantor suggested selling Humana's March 22.5 puts for a short-term bullish to neutral play on a beaten sector.

Managed health care stocks have gotten pummeled of late as investors worry how President Obama's health care plans will affect those companies' profits.

Case in point: Humana. Its stock has lost over half its value in the last month. But Mike is not alone in his tepid support for the sector.

"Right now, the market is reacting to the thing it hates most: uncertainty." said Ana Gupte of Sanford C. Bernstein & Co. "But the market is overreacting. And Humana's stock is not reflective of its future earnings potential," added Gupta, who rates the company as an "Outperform."

Unfortunately, Mike's early enthusiasm has not paid off. With expiration only two and half weeks away, Mike is in danger of having the stock put to him at a higher price than where the stock is currently trading. Still, his strategy is better than just buying the stock outright. Said Khouw. "It "If you sold the puts at the low yesterday $2.20, you’ll end up long the stock at $20.30 net of the premium when the stock get put to you," said Khouw. "It would obviously have been worse to have bought it at $22.82, which was the high."

So what's next for the faithful who followed along?

Couple options (no pun intended). Hope/pray the stock rallies and keep the premium from the put sale. Buy back the puts at a loss. Or a more productive scenario given current option prices: sell calls. If the stock gets put to you, one strategy that could help recoup your losses is to sell out-of-the-money calls against your long position.

"If and when the stock is put to you, you could look to sell some covered calls against it," said Khouw. "Over time, you'll bring the cost basis down if you're comfortable owning the stock here."

Questions, comments send them to us at: optionsaction@cnbc.com

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  • Melissa Lee

    Melissa Lee is the host of CNBC's “Fast Money” and “Options Action.”

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