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Commit To Buy WellCare Health Plans At $210, Earn 2.8% Using Options

By Market News Video Staff, Wednesday, June 19, 11:51 AM ET
Play Video: How To Sell A PUT


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Investors considering a purchase of WellCare Health Plans Inc (NYSE:WCG) stock, but tentative about paying the going market price of $295.05/share, might benefit from considering selling puts among the alternative strategies at their disposal. One interesting put contract in particular, is the December 2020 put at the $210 strike, which has a bid at the time of this writing of $5.80. Collecting that bid as the premium represents a 2.8% return against the $210 commitment, or a 1.8% annualized rate of return (at Stock Options Channel we call this the YieldBoost).

Selling a put does not give an investor access to WCG's upside potential the way owning shares would, because the put seller only ends up owning shares in the scenario where the contract is exercised. And the person on the other side of the contract would only benefit from exercising at the $210 strike if doing so produced a better outcome than selling at the going market price. (Do options carry counterparty risk? This and six other common options myths debunked). So unless WellCare Health Plans Inc sees its shares fall 29% and the contract is exercised (resulting in a cost basis of $204.20 per share before broker commissions, subtracting the $5.80 from $210), the only upside to the put seller is from collecting that premium for the 1.8% annualized rate of return.

Below is a chart showing the trailing twelve month trading history for WellCare Health Plans Inc, and highlighting in green where the $210 strike is located relative to that history:

The chart above, and the stock's historical volatility, can be a helpful guide in combination with fundamental analysis to judge whether selling the December 2020 put at the $210 strike for the 1.8% annualized rate of return represents good reward for the risks. We calculate the trailing twelve month volatility for WellCare Health Plans Inc (considering the last 251 trading day closing values as well as today's price of $295.05) to be 32%. For other put options contract ideas at the various different available expirations, visit the WCG Stock Options page of StockOptionsChannel.com.

In mid-afternoon trading on Wednesday, the put volume among S&P 500 components was 1.11M contracts, with call volume at 1.11M, for a put:call ratio of 0.70 so far for the day, which is above normal compared to the long-term median put:call ratio of .65. In other words, if we look at the number of call buyers and then use the long-term median to project the number of put buyers we'd expect to see, we're actually seeing more put buyers than expected out there in options trading so far today. Find out which 15 call and put options traders are talking about today.


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Commit To Buy WellCare Health Plans At $210, Earn 2.8% Using Options | Market News Video | Copyright © 2008 - 2019, All Rights Reserved

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