The post-earnings performance of UnitedHealth Group (ticker symbol: UNH) stock has been noteworthy, with traders responding to the recent financial results by pushing prices back to a critical support level near $430. Following this momentary dip, buyers have started to re-enter the market, creating a potential bounce play that could be leveraged over the next 90 days. In this article, we will delve into how investors can capitalize on this situation using the short iron condor options strategy.

On Thursday, UnitedHealth stock experienced a significant decline of over 22% after the company released its first-quarter earnings report. While the health insurance and medical data analytics giant reported mild growth in both revenue and earnings, its outlook for the current year was far from optimistic, leading to a bearish reaction from traders.

According to the IBD Stock Checkup, UnitedHealth's Relative Strength Rating plummeted to a concerning 33 on a scale from 1 to 99. This marks a stark contrast to just a week prior when its rating was a robust 93. Even more striking is the fact that earlier this year, in mid-January, the rating languished at a very weak 28. This fluctuation underscores the volatility and uncertainty surrounding UnitedHealths stock in relation to its peers within the IBD database.

Interestingly, despite the significant price drop, UNH has so far managed to avoid dipping below its year-to-date low of $438.50, which was established on February 21. This could indicate that the stock has found a level of support that traders may be looking to utilize in coming weeks.

Understanding the Short Iron Condor Strategy

The short iron condor is an options trading strategy that involves selling both a call spread and a put spread simultaneously. This strategy is predicated on the assumption that the stock price will remain within a specified range, thus allowing for potential profits from the premiums collected from the options sold.

For the short iron condor on UnitedHealth stock, a margin requirement of $2,000 is noted, based on the distance between the long and short strikes. Heres how the trade could be structured:

  • Sell to open 1 UNH July 19-expiring call with a strike price of 600
  • Buy to open 1 UNH July 19 call with a strike price of 620
  • Sell to open 1 UNH July 19 put with a strike price of 430
  • Buy to open 1 UNH July 19 put with a strike price of 410

Currently, UnitedHealth is trading closer to the lower end of this range, particularly the 410-430 strike prices. The setup detailed above may yield a credit of $6.91, equating to $691 for each set of calls and puts sold. This credit represents the maximum potential gain, but it comes with the stipulation that UnitedHealth's stock must remain between the strike prices of 430 and 600 for the trader to realize a profit at expiration.

The breakeven prices for this trade are calculated at $606.91 on the upper side (from the 600-620 calls) and $425.09 on the lower side (from the 410-430 puts). Holding within these boundaries will ensure that the trader can exit the position profitably.

Managing the Trade Effectively

Effective trade management is essential in navigating the fluctuations of UnitedHealth stock. The relative resistance zone is identified around the $600 mark, while support is established near $430. Below are three strategic approaches to managing this trade:

  • Consider buying back the short iron condor and closing the position once it reaches a predefined profit level that aligns with your trading strategy. With 92 days of premium available, as long as support and resistance levels hold, the trade premise remains intact. A good rule of thumb is to exit the trade with at least 21 days remaining until expiration, as volatility tends to impact option prices significantly in the days leading up to expiration.
  • Set price alerts for the critical levels of $430 and $600. If the stock breaks through either of these zones, allow for a recovery period of three to five days before deciding whether to exit the trade. This approach provides an opportunity to reassess the market conditions.
  • Implement predefined stop-loss orders to mitigate potential losses. Decide on a percentage loss that you are willing to accept, or set alerts at strategic points like $440 or $590, which can indicate unusual volatility that may affect your profits.

Anne-Marie Baiynd, a seasoned trader with 25 years of experience in stocks, options, and futures, provides further insights. She is also the author of "The Trading Book: A Complete Solution to Mastering Technical Systems and Trading Psychology." You can connect with her on X at @AnneMarieTrades and follow her contributions on Sirius Business Radio, Investor's Business Daily, the Benzinga Pro platform, and Topstep on YouTube.

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