UnitedHealth Group experienced a nice breakout on Friday on strong earnings numbers. UNH stock is also currently trading above the 50- and 200-day moving averages. This highlights the stock's strength lately amid the bear market.
UNH Stock: Trading A Bull Call Spread
UnitedHealth, which returned to IBD Leaderboard as a half-size position, is indeed showing improving relative strength as seen by its relative strength line. The RS line has climbed into new highs, meaning UNH stock is sharply outperforming the S&P 500. So, let's look at a bullish option strategy for this Dow stock: the bull call spread.
One way to gain exposure to a stock without risking too much is via a bull call spread, rather than buying the stock outright. This can be a good way to protect precious capital in this volatile market.
Let's assume a trader has a price target of 550 from now to mid-December.
A bull call spread is created through buying a call and then selling a further out-of-the-money call. Selling the further out-of-the-money call reduces the cost of the trade. But this trade also limits the upside.
Going out to the December expiration, a 540-strike call option in UNH stock traded around $32.60 on Friday, and the 550 call was around $29.15. Buying the 540 call and selling the 550 call would create a bull call spread. The trade would cost $345 (difference in the option prices multiplied by 100), and the maximum potential profit would be $655 (difference in strike prices, multiplied by 100 less the premium paid).
A bull call spread is a risk-defined strategy, so if UNH stock closes below 540 on Dec. 16, the most the trade could lose is the roughly $345 premium paid.
Maximum Profit Limit
Potential gains get capped above 550. So, no matter how high UNH stock might go, the most the trade could profit is $655.
In terms of trade management, if the stock dropped below 500, I would consider closing early for a loss.
Please remember that options are risky, and investors can lose 100% of their investment.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
