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An Interesting Short-Term Play on Aetna (AET)

We are always on the lookout for unusual option prices that might indicate a better-than-usual investment opportunity.  I would like to share one of those recent opportunities with you, one I personally acted on and passed on to Terry’s Tips  subscribers last Saturday.  It involves the venerable insurance company, Aetna.


 An Interesting Short-Term Play on Aetna (AET)

 This week, we are looking at Aetna (AET), a health care benefits company.  If you check out its chart, you can see that it does not historically make big moves in either direction, especially down:

AET Aetna Chart January 2017

AET Aetna Chart January 2017

In spite of this lack of volatility, for some reason, IV of the short-term options is extremely high, 44 for the series that expires in 10 days.  The company is trying to purchase Humana, and the justice department may have some objections, and there seems to be concerns how insurance companies will fare under the Trump administration, two factors which may help explain the high IV. Neither of the possible adverse outcomes are likely to occur in the next 10 days, at least in my opinion.

AET closed today (Monday) at $122.67.  I think it is highly unlikely that it will fall below $118 in 10 days when the 20Jan17 options expire.  Here is a trade I made today:

Buy to Open 10 AET 20Jan17 113 puts (AET170117P113)

Sell to Open 10 AET 20Jan17 118 puts (AET170117P118) for a credit of $.98  (selling a vertical)

I received $980 less $25 commissions, or $955.  The maintenance requirement, and my maximum theoretical loss in $5000 less the $955 I received, or $4045.  If AET closes at any price higher than $118 in 10 days, both these puts will expire worthless and I will get to keep my $955.  That works out to be a 23% return on my investment, not so bad considering that it is just for 10 days.

In the event that AET is trading below my downside break-even point ($117.06), I will be facing a loss.  If that is the situation, I will roll out this same strike-price spread to a further-out option series, and I should be able to do it at a credit.  That is how I would propose to postpone a possible loss and give the stock some time to return to over $118 where the puts will both expire worthless and give me a greater return than 23% (depending on the amount of the credit I receive).  Of course, I will have to wait longer than 10 days for that profit to come, but I can be a little patient.

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