A bearish options trade on this health care giant that's starting to show signs of cracking

Published Tue, Apr 23 202410:27 AM EDT

Nishant Pant @TheMeanTrader @TheMeanTrader

UnitedHealth soared 16% following its impressive earnings beat a week ago, even amidst the fallout from the cyberattack on its subsidiary, Change Healthcare. However, with broader market indicators showing signs of weakness, UNH is starting to reveal cracks — and the once-strong rally appears to be losing steam. To confirm a bearish bias on UNH, I am using two technical indicators in the chart below: RSI (relative strength index): As a stock climbs, the Relative Strength Index (RSI) gauges the strength of the trend. It's worth noting that the RSI is starting to curve downwards, signaling a loss of upward momentum. DMI (directional movement index): When the DI+ (green line) is above DI- (red line), the stock is in an uptrend. However, when the DI lines start changing direction, that indicates a possible change in the current trend. This is exactly what we are seeing in the chart below. Another notable sign is the blue line (ADX) which also measures the strength of the current trend and can be used as a divergence indicator. Note that ADX has been dropping consistently as UNH was going up. This is another sign that the current rally is not sustainable. The trade setup The trade structure I am using here is called a "bear put spread." At the time of writing this, UNH was trading at $491. To construct my bear put spread, all I need to do is buy a $495 put and sell a $490 put as a single unit. Most trading platforms will offer a bear put spread (or long put spread) as a trade type and automatically construct the trade for you. All one needs to do is make sure that they pick the right strikes and expiration dates. Here is my exact trade setup: Buy $495 put, May 10 expiry Sell $490 put, May 10 expiry Cost: $2.50 A nice thing about buying ATM (at-the-money) spreads, is that the math becomes very easy. ATM spreads can usually be bought for ½ of the width of the strikes. Since the width of our spread is $495– $490 = $5, I can buy the spread for $2.50. If UNH is trading at $490 or below on the expiration date, this trade will double my money, providing a 100% return on investment on the money invested. If UNH starts going against me, I would want to close the trade if I lose 50% of my investment (i.e., $1.25). By following this rule, every winning trade will offset two losing trades, helping to maintain a positive balance. This approach aims to optimize gains and mitigate losses effectively. -Nishant Pant Founder: https://tradingextremes.com Author: Mean Reversion Trading Twitter: @TheMeanTrader DISCLOSURES: None. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL'S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.