How to buy a major Dow component, at a discount
United Health It is one of the largest US companies paying a respectable dividend in one of the largest industries. Even so, I wouldn’t buy the stock outright.
Instead, I opt for an options strategy that makes me money for staying long on the sale. Specifically, I like to sell the June $360 puts for $10 (or better) rather than buying the stock now for a few reasons.
The market is nervous:
First, equity valuations are generally quite flexible. Forward-looking S&P 500 price-to-earnings multiples might not ring alarm bells at roughly 21x, but measures aimed at tracking valuations across business cycles, such as the Schiller CAPE (cyclically adjusted pe) ratio, are approaching historical highs. JP Morgan’s long-term valuation studies show that when multiples rise, returns over the next 5-10 years tend to be below average. If this is true, investors may want to consider strategies that create “stop returns.”
Option premium selling – particularly cash-covered puts – offers a way to express constructive views on quality companies while getting paid to wait for attractive entry points.
The company has turned the corner…
UnitedHealth Group (UNH) stands out as an interesting candidate for this approach. While the stock’s valuation isn’t exactly cheap after the recent rally, it’s still reasonable and well below the all-time highs of a few years ago.
Why? UNH went through a period of strategic missteps primarily related to cost pressures and execution problems at its Optum unit. However, the reappointment of the previous CEO began to restore confidence in the market. Early signs point to renewed operational discipline and a renewed focus on core capabilities (integrating healthcare delivery, insurance and analytics), creating potential for margin improvement. AI can also help speed healthcare, improve outcomes and reduce costs; Significant improvements for a managed care provider.
Insurers can benefit from artificial intelligence
Structurally, the healthcare industry continues to expand as a share of U.S. GDP, reflecting demographic developments, evolving medical technology, and increasing demand for integrated care solutions. UNH has consistently outperformed both overall industry and GDP growth by leveraging its scale, diversified revenue mix, and strong data-driven infrastructure. These fundamentals leave it well positioned for defense and sustainable growth, even as broader equity returns remain subdued. Healthcare services like toothpaste and toilet paper are also not optional, especially for the aging population.
TRADE:
- Sell the June 360 strike for $10
- Maximum Earnings: $10
- Breakeven: $350
- Maximum Loss $350
- Mid-level trading to tie up cash/margin
A cash-covered put allows investors to make money on option premiums while setting a disciplined entry point of approximately 5% below current market prices. If the option expires worthless, the seller keeps the premium as income. If appointed, the investor effectively purchases UNH shares at a discount, reducing the cost basis to the current level.
In both scenarios, the trade reflects the “get paid to wait” philosophy: generating returns on cash set aside while positioning for long-term participation in one of the most powerful franchises in American healthcare. In this case, the approximately 2.8% yield to maturity reaches approximately 22% on an annualized basis.
If the stock were to be transferred to someone, the effective purchase price would be $350 per share (less the premium collected from the $360 put strike) – a level corresponding to the most recent price increase. If one were appointed, he could further reduce his basis by continually selling covered calls against the resulting long equity position.
