economy
Volatility surge has trader eyeing one 'stable' stock
Mike Khouw is looking for a stable, cash-generating business where he can sell volatility instead of buying drama.
TL;DR
- Cigna (CI) is identified as a stable, cash-generating business for selling volatility.
- The company shows steady, modest revenue growth and a pattern of adjusted EPS growth, recently raising full-year guidance.
- The stock is supported by a significant buyback program.
- Cigna trades at roughly 9.5x forward earnings with a dividend yield of 2.2%.
- A proposed strategy involves selling the July $280 cash-secured put for a premium of $6.
- Two potential outcomes: keeping the premium if the stock stays above $280, or being assigned the stock at an effective basis of around $274 if it dips below $280.
- If assigned, the strategy shifts to collecting dividends and selling covered calls for persistent income.
- Risks include managed care headline risk and medical cost trends, but the assigned price is considered reasonable for ownership.