Let’s make a deal

05/10/19
  • CNC up more than 6% this week despite market sell-off
  • CNC has proposed buyout of one company, is subject of possible takeover by another
  • Options trades are concentrated in June contracts

There are times when a single story drives market action, for better or worse (trade wars, we’re looking in your direction), and other times when multiple narratives compete for dominance. When that happens, price action can come to a temporary standstill before things shake out.

But sometimes in these situations there are signals traders can watch for to get a handle on which way the market may be leaning.

Managed health care provider Centene (CNC) showed up on a LiveAction scan for stocks with high call/put ratios yesterday, with CNC call volume a little more than nine times put volume in early trading:

LiveAction Scan, high call/put ratio, 5/9/19. High call/put ratio. Nine times more CNC calls than puts.

Source: Power E*TRADE


A look-see at CNC’s options activity revealed the big trade yesterday was 2,000 contracts in the May $55 calls (representing 200,000 shares of stock) expiring a week from today, with 900 May $60 calls padding the total.

Those numbers are nothing to sneeze at, but that was only one part of the options activity story. It turned out that most of CNC’s open interest (OI, the number of unclosed options positions) was concentrated in June options, and the OI in the most active call options was more than twice that in the most active put options.

If at least some portion of all that call options activity represents traders making bullish bets on CNC (an assumption, but not an out-of-left-field one), the chart below may explain why. At a time yesterday morning when the S&P 500 (SPX) was down around 3.5% on the week, CNC was up 6.6%, thanks mostly to a huge rally on Monday, although the stock did a good job of holding its ground Tuesday–Thursday as the broad market tumbled amid trade-war angst:

Centene (CNC), 1/28/19–5/9/19. Centene (CNC) price chart. Rallying amid takeover talk.

Source: Power E*TRADE


None of this action was particularly mysterious, because CNC was apparently, as the Street likes to say, “in play.” And it was in play in more than one direction:

1. On March 26, CNC agreed to a $15 billion deal to buy another managed health care provider, WellCare Health Plans.1

2. On May 6, reports surfaced that health benefits provider Humana (HUM) would consider buying CNC—if CNC dropped its acquisition of WCG.2 (And for good measure, reports have emerged that two hedge funds invested in CNC would oppose the WCG deal.3)

The price chart shows that in between these two developments the stock fell to around $45.50 (its lowest level since November 2017), followed two days later by an estimate-beating earnings release and a rally back above $57.

The stock has been holding its breath the past three days, but the fact that it has remained resilient in the face of the SPX’s largest pullback of the year—while call options activity outpaces put activity—could lead traders to see the potential for another upthrust if the trade-war situation resolves positively.

Stay tuned, this story hasn’t reached the final chapter.

Market Mover Update: Ubiquiti Networks (UBNT) dropped nearly 10% yesterday after releasing earnings, but rallied to pare that loss to less than 5% on the day. As discussed in “Bring on the numbers,” in the past UBNT has experienced some of its larger post-earnings rallies after posting large declines on earnings days.

Today’s numbers (all times ET): Consumer Price Index, CPI (8:30 a.m.), Baker-Hughes oil rig count (1 p.m.), Treasury Budget (2 p.m.).

Today’s earnings include: Enbridge (ENB), Enerplus (ERF), JD.com (JD), Viacom (VIAB).

 

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1 Bloomberg.com. Centene to Buy WellCare for Over $15 Billion in Cash, Stock. 3/26/19.

2 Forbes. Centene Deal Talk Comes As Humana's Medicaid Business Grows. 5/7/19.

3 TheFly.com. Humana would consider deal for Centene, blog report claims. 5/6/19.

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