A reader asked me to take a look at Aetna (AET). I haven’t really followed the stock much so this is my early 2 cents worth. On 5/3, I wrote about DNA coming to a point on its chart and that usually means the stock is going to make a big move in one direction. Knowing the direction is the harder part. AET has had a nice run up since last summer with higher lows along the way, but when you look at the daily chart going back as far as the highs in February 2006 you find a downward sloping line that proved to be a ceiling on Feb 20th and 22nd of this year and again on March 21st and April 9th. These upper and lower lines came together around 45 around April 25th which happened to coincide with earnings – funny how that works… AET jumped $2 and has since climbed another $1.75+-.
AET is now above its upper trend line which can mean that it has overextended itself and is due for a pull back or is breaking out to new highs. I think it’ll settle down for a breather before taking off again, making it ripe for selling puts at a 45 strike. A drop of a $2-3 reverting it to the norm could raise fear in some and increase the premium higher than it should at the 45 strike. I don’t think it’ll go below 45, probably not even lower than 46.
I checked Schaeffer’s Research and they rate Aetna 6 out of 10. Aetna is expanding operations into the Carolinas, giving it a good growth opportunity. Throw in the good earnings from last week and a PEG ratio of only 0.95 and the downside to AET doesn’t look bad at all. That appears to be the general consensus among other investors because the puts offer almost no premium. Selling them wouldn’t be worth the effort. Buying calls might be though.
Looking at the extrinsic value in the June 45 and 50 strikes, the June 45 is the safer move. You have to lay out more money to enter the position, but have a higher likelihood of profiting from it. You enter the land of profits at 49.30+- with the June 45 and at 51.10 with the June 50 (not counting commissions.) Since I think the big jump is done for AET and it could recoil some before moving up again, selling the June 50 call could work for the wanton risk takers. Worst case would be that if it does climb you might have to buy the underlying stock if it crosses 51.
It’s not for me since I can’t work my trading model on it, but that’s my take on Aetna.
Click on the thumbnail for a larger chart: