401ktimer1 (33.74)

Humana (HUM) Low Risk Option Trade

February 06, 2012 – Comments (0) | RELATED TICKERS: HUM , UNH , WLP

Humana (HUM) is a large health care plan provider in the US.  Its competitors include United Health, Aetna, and Cigna.  Today HUM shares dropped as much as 6% because the comparny reported earnings that missed estimates.

Here are key statistics for HUM:

Share price: ~$85
Earnings per share (trailing 12 months):  $7.86
Trailing P/E (ttm, intraday): 10.80
Forward P/E (fye Dec 31, 2012): 10.63
Book Value Per Share (mrq): 48.06
Forward Annual Dividend Yield: 1.10%

Much of the book value of the company is in cash and long term investments. So, if we back out the net intagible assets from market price, the shares are being valued at around ~$45 for its future earning streams.  If the company maintains the current earnings trend, it will make over $45 in just 6 years.  Unless one believes that there is some emerging risk to these future earnings streams (perhaps due to new federal health care plan laws?), the shares present a compelling value at these prices.

However, to reduce the risk of the trade even further, selling cash covered put options ilo buying shares immediately would be a good strategy.

So, here is the cash covered put option trade in HUM:

Sell May 2012 $82.50 Put for $4.00

With this trade, if the shares trade above $82.50 till the expiration date (May 18, 2012), the option will expire worthless and we will make around 5% profit.  On the other hand, if HUM shares drop below, $82.50, we will be forced to buy the shares and the net cost/share would $78.50.

To see how such cash covered put option trades worked in the past, see:

July 2011 Trades

Aug 2011 Trades