Health insurance may already be expensive, but the cost of “insuring” the stocks of health insurance companies could be even higher. UnitedHealth Group is one example; the company will release its financial report on Tuesday.

Before the release of the quarterly financial report on October 13th, the implied volatility was twice the realized volatility. In other words, the option prices—i.e., the cost of “insuring” the underlying stock—were quite high, which created favorable conditions for selling premium strategies.

Regarding the UnitedHealth stock, traders can sell the November option premiums to reduce the cost of the longer-term January 2027 call options by more than half. Before UnitedHealth announced its financial results on Tuesday, many of the losses caused by earlier mistakes had already been reflected in the stock price. Although rising medical costs are always a downside, the management's target of 13% to 16% earnings per share growth seems achievable. Over the past five years, this stock has remained relatively stable.

By the way, according to the company, 90% of United's 52 million customers worldwide are in the United States. According to the company's own statistics, it covers about 12% to 13.5% of the US population.

Member growth is crucial for earnings per share growth, as is the underwriting profit margin. In managed healthcare and health insurance businesses, the underwriting profit margin refers to the core operational profitability generated directly from managing medical risks. It measures the financial return that insurance companies obtain merely from collecting premiums and managing medical services. In terms of member growth, the number of insured individuals driven by the ACA market seems to be declining, which puts pressure on the revenue of this business segment, which was once a driver of growth. Fortunately, this portion accounts for less than Medicare and commercial insurance within the overall company. Between 2024 and 2025, the number of commercially insured individuals increased by about 2.9% year-on-year, while the total number of insured individuals in Medicare grew by 4.5%. The growth of the commercial business may not seem impressive at first glance, but considering that the US labor force grew by about 1.4% during the same period, United seems to be expanding its market share.

Calculated based on a 17-fold forward earnings yield, and with free cash flow equivalent to 5.7% of the company's value and 6.5% of its market capitalization, this stock is not priced as if it will experience a significant recovery. In terms of the options market, the implied volatility is 40%, while the actual volatility of this stock is only 20%. Of course, the figure of 40% reflects this week's financial report, and it may be higher because the stock has experienced several shocking fluctuations after financial reports in the past eight disclosed reporting periods. In January of this year, the stock price fell by nearly 20% after the financial report; a similar sharp drop also occurred in April 2025.

Currently, the stock price of UNH is approximately 12% to 13% lower than the median of the two-year high-low range. In the past 8 financial reports, the stock closed lower on 5 occasions. According to data from Cboe LiveVol, the current option price implies a post-financial-report stock price volatility of 6.5%, which is the second-highest implied volatility level in the past two years.

What is the trading strategy?

Selling a November 340/420 straddle combination to help finance the purchase of a January 2027 400 call option. The cost of buying one January 2027 400 call option is $18.20. Selling one November 420 call option can earn $5.80, and selling one November 340 put option can earn $4.80, for a total income of $10.60. The net expense is about $7.60, which reduces the cost of the call option by approximately 58%. If UNH closes between $340 and $420 at expiration in November, both legs of the sale will be invalidated, and the investor will hold this January 2027 call option for $7.60. The break-even point at expiration in January is $407.60. If the stock price rises above $420, it will be covered by the long 400 call option. The real risk lies below: if the closing price falls below $340, it means that stocks will need to be purchased at that price, and after accounting for the net expense, the actual cost basis is about $347.60.

• Bought 1 UNH January 2027 call option for $18.20
• Sold 1 UNH November 420 call option for $5.80
• Sold 1 UNH November 340 put option for $4.80
• The net expenditure is approximately $7.60 (each spread corresponds to 100 shares, which means $760 per group).

Revelation: Tidal holds/owns all the securities mentioned in this text.

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