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Electing Options in Managed Care
THE DIFFERENCE BETWEEN campaigning and governing is as significant as the difference between trading and investing.
But rather than waiting to see how victorious Democrats will administer Congress, traders are reflexively selling stocks in companies they believe will come under pressure from Democratic committee chairmen.
Options traders are taking profits on put options that they recently bought in anticipation that certain sectors -- including managed-care, pharmaceutical, finance and defense stocks -- would decline if control of the House returned to the Democrats after 12 years.
The first major wave of election-induced selling is taking place in the health-care sector, especially among health insurers Humana and Aetna, which until today enjoyed high regard among investors for the second half of the year. Humana stock was recently down about 5%, while Aetna was down 3%.
Humana's November 55 puts, which were actively bought in Monday's session, are now being sold. With the stock at 55, Humana's puts were recently up 55 cents at $1.15 on volume of 3,101 contracts, compared with outstanding positions of 12,685 contracts.
With Aetna's stock recently down at 39.98, the November 40 puts were up 40 cents at 80 cents on volume of 5,274 contracts, compared with outstanding positions of 11,330 contracts.
"This is one of those times of buy rumors and sell news," said Jon Najarian, of optionsmonster.com, a trading advisory service.
To be sure, the sell-off in Humana, Aetna, and other managed-care stocks may ultimately prove to be an overreaction, and therefore a buying opportunity, as the realities and limitations of the Democratic-dominated House start to filter into the financial market.
If the Democrats dominate only the House, and not the Senate, their ability to enact legislation will be restricted. This would mean that their powers of governing may be reduced to holding Congressional hearings to highlight issues, rather than passing legislation that, say, would lower pharmaceutical prices or change health insurance. Conversely, if the Democrats win the Senate, rest assured the President would actively use his veto authority.
One way to trade Humana and Aetna would be to buy call options that expire in three months or more, such as Aetna's April 45 calls or Humana's February 60 calls, the prices of which are sharply lower as the stocks decline.
Najarian said it's likely that the stocks, and their sectors, trade under pressure for a few weeks, and then, depending on how the election dust settles, retrace their losses.
"The market's always forward-looking," said Najarian, a veteran options trader. "It could be reacting today and rallying tomorrow in those stocks and in those sectors."
(c) Barron's Nov 8 06
THE DIFFERENCE BETWEEN campaigning and governing is as significant as the difference between trading and investing.
But rather than waiting to see how victorious Democrats will administer Congress, traders are reflexively selling stocks in companies they believe will come under pressure from Democratic committee chairmen.
Options traders are taking profits on put options that they recently bought in anticipation that certain sectors -- including managed-care, pharmaceutical, finance and defense stocks -- would decline if control of the House returned to the Democrats after 12 years.
The first major wave of election-induced selling is taking place in the health-care sector, especially among health insurers Humana and Aetna, which until today enjoyed high regard among investors for the second half of the year. Humana stock was recently down about 5%, while Aetna was down 3%.
Humana's November 55 puts, which were actively bought in Monday's session, are now being sold. With the stock at 55, Humana's puts were recently up 55 cents at $1.15 on volume of 3,101 contracts, compared with outstanding positions of 12,685 contracts.
With Aetna's stock recently down at 39.98, the November 40 puts were up 40 cents at 80 cents on volume of 5,274 contracts, compared with outstanding positions of 11,330 contracts.
"This is one of those times of buy rumors and sell news," said Jon Najarian, of optionsmonster.com, a trading advisory service.
To be sure, the sell-off in Humana, Aetna, and other managed-care stocks may ultimately prove to be an overreaction, and therefore a buying opportunity, as the realities and limitations of the Democratic-dominated House start to filter into the financial market.
If the Democrats dominate only the House, and not the Senate, their ability to enact legislation will be restricted. This would mean that their powers of governing may be reduced to holding Congressional hearings to highlight issues, rather than passing legislation that, say, would lower pharmaceutical prices or change health insurance. Conversely, if the Democrats win the Senate, rest assured the President would actively use his veto authority.
One way to trade Humana and Aetna would be to buy call options that expire in three months or more, such as Aetna's April 45 calls or Humana's February 60 calls, the prices of which are sharply lower as the stocks decline.
Najarian said it's likely that the stocks, and their sectors, trade under pressure for a few weeks, and then, depending on how the election dust settles, retrace their losses.
"The market's always forward-looking," said Najarian, a veteran options trader. "It could be reacting today and rallying tomorrow in those stocks and in those sectors."
(c) Barron's Nov 8 06