Thursday, March 29, 2012

Humana Inc. (HUM) - Supreme Court Decision Looms; Industry On Hold, Vol Pops

HUM is trading $89.77, up 1.3% with IV30™ up 10.8% as of ~10:50am EST. The LIVEVOL® Pro Summary is below.


Click for Free Trial


Humana Inc. (Humana) is a health care company. Humana operates in three segments: Retail, Employer Group, and Health and Well-Being Services. The Company offers a range of insurance products and health and wellness services that incorporate an integrated approach to lifelong well-being.

This is a vol note surrounding the increasingly contentious and interesting pending Supreme Court Ruling on President Obama’s healthcare bill. Here’s a news snippet that focuses on the impact to health insurers. If you haven’t read up on the bill and pending ruling yet, I highly recommend checking that out as well.

It can be difficult to read the tea leaves after a Supreme Court debate, but the arguments over the law this week appear to point to a favorable situation for health insurers, Bernstein Research analyst Ana Gupta argues.

Based on commentary from the justices, it looks like the law’s requirement that individuals purchase health insurance will be shot down, Gupte argues. But in that case, the court will also probably invalidate the portion of the law that makes insurers price policies the same whether you are sick or healthy (the part that allows people with pre-existing conditions like cancer to get access to affordable coverage). That would be a net positive for insurers, Gupte says.

The court does not look [particularly] likely to strike down the entire law, a scenario that the insurance industry would be against. That might be somewhat [positive] for insurers, but could create uncertainty, Gupte argues.

Gupte sees the managed care sector rallying after the decision in the case is handed down in June.

Source: Barron’s via Yahoo! Finance, Insurers Look Poised to Benefit After Obamacare Arguments: Bernsteinwritten by Avi Salzman

Either way it sounds like a vol event is embedded in these companies and a potential move may be coming. Let’s turn to the Charts Tab (six months), below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

On the stock side, we can see a nearly 50% rise from six months ago. But, it’s the vol that caught my attention. The pop today is rather expected – but check out the level relative to its past.

The 52 wk range is [20.72%, 51.00%], putting the current level in the 10th percentile. Odd given the potential for an abrupt reaction off of the news. Then there’s the issue of earnings, which are due out on 4-30-2012. Hmmm.

Let’s turn to the Skew Tab, below.

We can see a rather noticeable “normalcy” to the skew shape across all of the front expiries. In other words, the option market doesn’t reflect any kind of bias. I do note that May is elevated to the other two expiries because of earnings, but that vol diff is relatively muted.

To understand what option skew is and why it exists you can read this post: Understanding Option Skew -- What it is and Why it Exists

Let’s turn to the Options Tab for some more detail.

I wrote about this one for (OptionsProfits), so no specific trade analysis here. Across the top, we can see that while Apr is priced to 23.68%, May is priced to 27.24% (and Aug is 26.75%). That 27.24% level would be in the 24th percentile – so still depressed relative to its own history.

In English, the May vol which has both this industry wide event and a company specific earnings release, is priced in the bottom quartile (annual) of vol (relative to its own history). One huge note here, this is an event stock as long as the decision isn’t released, which means back month vega can be very risky – all of the premium can be lost in a heart beat. That premium is at high risk in a very short period of time.

This is trade analysis, not a recommendation.

Follow Live Trades and Order Flow on Twitter: @Livevol_Pro

Legal Stuff:

No comments:

Post a Comment