Centene’s health stock is good option for Options traders ahead of this weeks big conference
This week, we’re set to deep dive into a promising health insurance stock, Centene (CNC), as we unlock the most recent options trading strategies employed on it in the lead-up to a major industry conference.
On Friday, Centene experienced almost nine-fold the average daily call volume in anticipation of Barclays’ 26th Annual Global Healthcare Conference that’s happening this week. The shares have increased more than 27% since the beginning of September.
The most actively traded were the weekly $82 calls for March 22nd and 28th, being traded as a package. The pricing suggests the trader buying the March 28th calls for $1.20 per contract and selling the March 22nd weeklies at $.35 per contract. Both ends of the trade indicate new opening interest.
Bernstein has recently reaffirmed Centene with an outperform rating and a $100 price target.
Traders are beginning a long calendar spread, hoping to profit from the “theta” or “decay” of the nearer-dated option to subsidize the purchase of a longer-dated one. This trade is often commenced with an event like the quarterly financial results release in view. Centene’s last earnings report was on February 6th, and they’ll release their next quarterly earnings on April 26th, along with a conference call to discuss the results.
A closer look at Centene
Centene provides health insurance to over 27 million people, with the majority of its plans contracted with state Medicaid programs, yielding 65% of its revenue, and Medicare, providing 15% of revenues. Their revenue has been growing, doubling over the past five years.
OpenInterest.PRO shows that net income varies from one quarter to the next, but overall, it has expanded roughly 93% from $1.65 billion in 2019 to $3.1 billion last year.
Despite its impressive growth, Centene has been trading at less than 13 times its trailing 12-month earnings, which may seem undervalued. Historically, the company has traded at an average of 15.7 times earnings, which is considerably less expensive in comparison to managed care companies like UnitedHealth.
However, Centene lost a state Medicaid contract recently in Texas, which led Cowen to suggest the potential for decreasing political access. Investors are now skeptical, worrying about potential contract losses in Florida and Georgia. Florida’s announcement is expected on March 25th, which is likely what the options trader is targeting.
As for placing calendar spreads into catalysts, while I generally appreciate them, the price of this one was not particularly compelling as of Friday’s close. If the calendar trade isn’t feasible, investors can consider entering at or slightly out-of-the-money vertical “debit” spreads, where the spread is being bought.
Remember, if you choose to place a directional bet on Centene leading up to the expected announcement, always use limit orders when trading options. Start at a conservative price and progressively adjust your limit order. Always trade between the bid/ask spreads when the spreads are wide or not at all.
