UnitedHealth (UNH.US) Q3 earnings report about to be released: Options betting on 6.5% stock price volatility, strategists suggest "sell short, buy long" to reduce costs

According to Zhihu Finance APP, UnitedHealth (UNH.US) will announce its third-quarter earnings report before the U.S. stock market opens on Tuesday. The options market expects the stock price to swing 6.5% around the earnings release. Michael Khouw, strategist at Tidal Financial Group, said the elevated options premiums provide traders with an opportunity: by selling November options premium, they can finance call options expiring in January next year at a lower cost.

Options Pricing: Implied Volatility of About 6.5% Around Earnings

"The only thing more expensive than health insurance might be the cost of insuring the stock of a health insurance company," Khouw pointed out, using UnitedHealth as an example.

He noted that options imply UnitedHealth's stock price will fluctuate by 6.5% around the earnings release, with an implied volatility of about 40%, which is roughly twice the stock's actual volatility of 20%. This represents the second-highest implied move in nearly two years. It is noted that the stock has fallen after earnings five out of the last eight times, including declines of nearly 20% after the January and April 2025 reports.

Strategy Breakdown: Sell November Options, Buy January Calls for Next Year

Khouw recommends using a "short premium" strategy: sell two November options to collect $10.60 per share, offsetting some of the cost of the longer-term call option.

Specifically, the strategy involves buying a call option expiring January 2027 with a strike price of $400 at a cost of $18.20 per share; simultaneously sell a November call option with a $420 strike for $5.80 per share; and sell a November put option with a $340 strike for $4.80 per share. The final net cost is $7.60 per share, or $760 per contract, reducing the upfront cost of the call option by about 58%.

Where Are the Risks If the Stock Price Swings Sharply?

If UnitedHealth’s stock price is between $340 and $420 at November expiration: the short-term options sold will expire worthless. The breakeven point when the January call option expires is $407.60.

If UnitedHealth’s stock price falls below $340: the sold put option may require the seller to buy shares at $340. After accounting for the net cost of the trade, the effective cost is about $347.60 per share.

Khouw noted that UnitedHealth’s stock price has been mostly flat over the past five years, currently 12% to 13% below the midpoint of its two-year high-low range. He said the stock’s forward P/E is about 17 times, not factoring any recovery expectations. He believes the company's 13%-16% profit growth target is achievable, but rising medical costs are a headwind.

Khouw also mentioned enrollment trends. Enrollment in the Affordable Care Act (ACA) market appears poised to decline, though this segment is smaller than Medicare and commercial insurance. Commercial insurance enrollment is expected to grow about 2.9% from 2024 to 2025, while total Medicare enrollment is projected to increase 4.5%. Growth in commercial insurance outpaces the approximately 1.4% growth rate of the U.S. labor force.

UnitedHealth Q3 Earnings Preview

Khouw projects UnitedHealth’s third-quarter revenue at $111.49 billion, down 0.5% quarter-on-quarter; EBITDA is expected at $6.47 billion, a 28% decrease quarter-on-quarter; EBIT is forecast at $5.44 billion, down 32% quarter-on-quarter; GAAP EPS is expected to drop 36.81% quarter-on-quarter.

Fiscal.ai’s year-over-year estimates predict revenue at $112.4 billion versus $113.2 billion in the same period last year; EBITDA at $6.45 billion, higher than last year's $5.25 billion; and EPS at $3.06, up from $2.92 last year.

TD Cowen cut UnitedHealth’s price target from $430 to $402, implying about 6% upside, while maintaining an “Outperform” rating. The firm anticipates that the company will provide preliminary commentary on its 2027 EPS outlook in the report.

Enrollment Divergence in U.S. Medicare Advantage Plans

Regarding the healthcare business, several institutional analysts also compared each company’s enrollment composition in Medicare Advantage (MA) plans.

Piper Sandler said that based on September 2026 enrollment data, 66.8% of UnitedHealth members are enrolled in four-star or higher rated plans, describing the company's resilience as “impressive” and undervalued. Oppenheimer noted that in 2027, the proportion of UnitedHealth members in four-star or higher rated plans drops by 15%, while Elevance Health falls by 10%, CVS Health by 15%, and Centene by 9%. In contrast, Humana’s rate rises to 95% from 42% a year earlier.

Retail Investors and Wall Street Analysts Both Bullish on UnitedHealth

On Stocktwits, sentiment among UnitedHealth retail investors jumped from “bullish” a day ago to “extremely bullish,” with 24-hour news volume surging 1,680%.

According to Tipranks, overall Wall Street analysts hold an optimistic view of UnitedHealth, with a consensus rating of “Strong Buy” and an average price target of $485.00, 28% higher than the latest closing price.

As of the time of writing, UnitedHealth’s pre-market share price is up 1.46%. The stock has risen 17% year-to-date.