July 11th Options Now Available For Humana (HUM)

The article discusses potential options strategies for Humana Inc. (HUM) stock, focusing on selling a $225 put and a covered call strategy using the $235 call. Selling the $225 put offers a potential 4.49% return (38.10% annualized) if the contract expires worthless, with a 57% probability of that outcome, while the covered call at $235 could yield a 7.26% return if the stock is called away, or a 4.55% boost (38.59% annualized) if it expires worthless, with a 52% probability. The implied volatility for the put and call options are 51% and 55% respectively, while the trailing twelve month volatility is 45%.

Analysis

The article outlines two specific options strategies for Humana Inc. (HUM), currently trading at $228.79 per share. Firstly, selling a put contract at the $225.00 strike price, with a bid of $10.10, could lower an investor's cost basis to $214.90 if assigned, representing an attractive entry point for those already interested in acquiring HUM shares. This out-of-the-money put (approximately 2% below the current price) has a 57% chance of expiring worthless, which would yield a 4.49% return on the cash commitment, or an annualized 38.10% (YieldBoost). Secondly, a covered call strategy involves purchasing HUM shares at $228.79 and selling the $235.00 call option, which has a bid of $10.40. This strategy could generate a total return of 7.26% if the stock is called away by the July 11th expiration. If this call, which is approximately 3% out-of-the-money, expires worthless (a 52% probability), the investor retains the shares and the premium, representing a 4.55% YieldBoost, or 38.59% annualized. The implied volatility for the put is 51% and for the call is 55%, both notably higher than Humana's actual trailing twelve-month volatility of 45%, suggesting options are pricing in higher expected future price swings.

Key Decisions for Investors

• Investors bullish on Humana and willing to acquire shares at a discount to the current market price of $228.79 might consider selling the $225 put, targeting a potential cost basis of $214.90 or earning a 4.49% premium if the option expires worthless.
• Existing Humana shareholders seeking to generate income and comfortable with capping potential upside above $235.00 could evaluate writing the $235 covered call, which offers a 7.26% return if called or a 4.55% income boost if the option expires out-of-the-money.
• Investors should note that the implied volatilities of 51-55% are elevated compared to the stock's 45% historical volatility, which benefits option sellers through higher premiums but also indicates increased market expectation of price movement, thereby requiring careful risk assessment for either strategy.
• Before implementing these strategies, investors must assess their individual risk tolerance, understand the mechanics of option assignment, and consider the possibility of forgoing significant upside if HUM shares rally substantially beyond the covered call strike.