Bearish bets seen on U.S. insurers ahead of Medicare rate announcement

NEW YORK Wed Feb 19, 2014 7:33pm EST

NEW YORK (Reuters) - A flurry of bearish bets placed Wednesday in the options for some health insurers caught the eye of several analysts, who said it appears that someone is banking on a sizeable drop in their stocks by the end of the week, which is also when 2015 Medicare payment rates are expected from the government.

The most aggressive activity occurred in options on UnitedHealth Group Inc's (UNH.N) shares, with a spate of purchases of puts that would benefit from a drop in the stock.

According to options analytics firm TradeAlert, a trader bought 2,053 contracts of February puts at a strike price of $71, which is about 3.5 percent lower than the stock's current price of $73.55. These contracts will expire on Friday, and it has been more than two months since the stock has seen that large a move lower over a two-day period.

The February $72 puts also saw heavy activity, according to TradeAlert. Volume was brisker than normal.

"Given that other trades are usually 200-300 contracts (in the stock), this purchase, which was made so close to expiration, definitely seems to be some sort of speculative move if there is news coming out," said Randy Frederick, managing director at Charles Schwab in Austin, Texas.

Options activity in Humana Inc (HUM.N) also perked up, with one of the most active contracts being some weekly February $94 puts that expire February 28, as well as some monthly Feb $92.35 puts that expire on Friday. Both strike prices are substantially below the stock's $101.98 closing price on Wednesday.

The activity comes ahead of a key government announcement due as early as this week about next year's expected Medicare reimbursement rates, a key revenue source for both UnitedHealth and Humana. It has jolted these stocks before.

Just about one year ago, the stocks took a pounding when Medicare Advantage plan payment rates were forecast to be cut under a preliminary proposal from the Centers for Medicare and Medicaid Services. Humana's shares plunged 6.4 percent in one day, while UnitedHealth's stock shed 3.7 percent over two days.

The stocks rebounded sharply just over a month later when the final payment rates did not reflect as large a cut as originally proposed.

Meanwhile, readings of implied volatility, a key component of options prices, have been rising for both stocks ahead of the expected announcement.

The 30-day at-the-money implied call and put volatilities for United National Health UNHATMIV.U were at around 23 on Wednesday, the highest level since before the company's third-quarter earnings announcement in October, according to Thomson Reuters data. The level was also higher than ahead of last year's Medicare rate announcement.

In Humana, the 30-day implied volatility HUMATMIV.U options as well, up to nearly 40 percent from a day ago and at the highest level in nearly a year.

As implied volatility rises, options premiums, or prices, typically follow suit, reflecting the elevated risk to the seller in the event of an outsized move in the stock.

(Reporting by Angela Moon; Editing by Dan Burns and Lisa Shumaker)

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