UnitedHealth bets before legal action deliver payoff
By Doris Frankel
CHICAGO, Feb 14 (Reuters) - Options trading in health insurance stocks turned unusually busy ahead of news that New York State plans to sue UnitedHealth Group, and that has some analysts questioning whether word leaked out beforehand.
While it may never be known whether nonpublic information was behind the trading, one thing is clear: one or more traders made a killing on options that briefly rocketed in value when UnitedHealth shares fell Wednesday as New York Attorney General Andrew Cuomo unveiled his investigation.
"It looks to me like someone might have known the news was pending and aggressively bought puts ahead of the announcement," said Henry Schwartz, president of options analytics firm Trade Alert in New York.
The U.S. Securities and Exchange declined to comment on the unusual activity in UnitedHealth.
Trading activity in both puts and calls in almost all health insurers shot up early Wednesday following news that Cuomo would soon detail an investigation of the industry's reimbursement practices.
Shares of UnitedHealth (UNH.N) as well as rivals Humana (HUM.N), Aetna (AET.N) and WellPoint (WLP.N) all sank after the start of New York Stock Exchange trading as investors awaited details slated for release around noon in New York.
"The interesting thing was that there were a string of very suspicious put trades in UnitedHealth, just ahead of the news conference by the New York Attorney General," said Jon Najarian, a founder of Web information site optionmonster.com.
"My suspicion was that somebody got wind of which health insurer would be charged by Cuomo's office ahead of his news conference," Najarian said.
The busiest contract was the soon-to-expire February 45 puts, which give the right to sell UnitedHealth shares at $45 a piece. UnitedHealth shares had closed the previous day at $48.27, and with the stock falling to around $46.50 shortly after Wednesday's opening bell, prices on the February $45 puts, which expire Friday, started to climb.
"The big winners of this bit of intraday drama appear to those who sold February $45 puts as they peaked in price at $1.55, and traders who bought them back as the value of the $45 put declined to about 40 cents, closing the trade with a 70 percent profit margin," said Rebecca Engmann Darst, equity options analyst at Interactive Brokers Group.
Meanwhile, Najarian said roughly 9,000 February $45 puts changed hands before Cuomo's press conference, all at prices between 20 cents and 40 cents a contract with the stock trading around $46.50.
Then, when Cuomo revealed his intention to sue UnitedHealth just before noon, the stock sank, dropping briefly to a low of around $44.80. That meant the February $45 puts were in-the-money, and their value climbed to $1.55 a contract. The premiums started to fall as the shares bounced back.
UnitedHealth stock closed down on Wednesday to $1.30 to $46.97.
Buyers of those 9,000 contracts at 40 cents or less earlier in the day stood to gain at least $1.15 per contract, or a very fast $1.035 million if they cashed out instantly after the news.
A total of 34,361 February $45 put contracts traded on Wednesday and that activity boosted open interest in that strike from an opening level of 2,481 contracts to 12,222 contracts, data from Trade Alert showed. (Reporting by Doris Frankel, editing by Leslie Gevirtz)
