Two Ways to Play Centene's Next 40-Day Moving Average Bounce

10/19/2017 3:46 pm EST


Elizabeth Harrow

Director of Digital Content, Schaeffer's Investment Research, Inc.

Trade idea: For those looking to trade CNC now, a long call spread allows you to take part in a bullish share price move at a lower upfront expense than buying a lone call option, says Elizabeth Harrow, at Schaeffer’s Investment Research.

As a provider of healthcare services through government-sponsored programs -- including Medicaid and the Children's Health Insurance Program (CHIP) -- Centene Corp. (CNC) stock has been slightly more volatile than usual in response to recent headlines about the fate of Affordable Care Act subsidies. But with the company's earnings report slated for next Tuesday, Oct. 24, CNC shares have stabilized just above a key moving average.


Specifically, the stock is currently within one standard deviation of its rising 40-day moving average.

Schaeffer’s Senior Quantitative Analyst Rocky White says CNC's meet-up with this trendline has seriously bullish implications.

There have been eight previous occasions where CNC has:

(a) closed above its 40-day moving average;

(b) traded above this moving average 60% of the time over the last two months;

and (c) been above the trendline for eight of the last 10 sessions.

Following those eight signals, CNC has been higher 75% of the time five days later, with an average return of 2.5%. And looking out 21 days after a signal, the stock boasts 86% positive returns, and an average return of 5.72%.

Based on CNC’s current share price of $93.56, this means we might reasonably expect to see the stock trading north of $98 by the time November-dated options expire -- perhaps even revisiting its Sept. 13 record peak of $98.72. Such a move would simply continue the equity’s longer-term rise. On a year-to-date basis, the shares have racked up a market-crushing 65.6% gain.

And CNC has rarely been more popular among options traders. Total open interest on the stock stands at a 52-week high of 50,984 contracts, according to Trade-Alert -- and 66% of those contracts are put options. Quite a bit of that put open interest is concentrated at short-term, out-of-the-money strikes, including peak open interest of 6,823 contracts at the November 90 put.

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This open interest configuration could be indicative of low expectations for CNC -- or, given the breakout price action this year, it could reasonably be the result of shareholders locking in some of their paper profits via protective put positions.

For those looking to capitalize on another potential short-term CNC rally from its 40-day moving average, be aware that November-dated option premiums are running a little high right now, due to the upcoming earnings event. As such, the best play here might be to wait out next Tuesday's earnings release before buying calls. The post-event volatility crush should bring option premiums down to earth, allowing you to play a follow-through rally at a lower cost. This "wait and see" method also gives you the opportunity to sidestep any unexpected downside surprises.

Of course, the risk here would be missing out on a possible post-earnings surge higher. For those looking to trade CNC right here and now, a long call spread -- wherein a higher-strike call is sold to offset the cost of buying a lower-strike call -- allows you to take part in a bullish share price move at a lower upfront expense than buying a lone call option.

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