Opinion on  Aetna Inc (AET)     Sector: Financial  >  Industry: Insurance (Accident & Health)
Bullish on AET ...

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2007   #56

Aetna (AET)

There are few sectors more maligned in 2008 than the healthcare group. The Morgan Stanley Healthcare Providers Index (HMO) has plunged more than 43% since January, compared to the 15% year-to-date loss in the S&P 500 Index (SPX). Even financial stocks, plagued by daily reports on the global credit crisis, are faring better, with the AMEX Select Financial Services Index (IXM) dropping 34% on a year-to-date basis. What's more, with a heavy bout of selling taking hold of the market on Friday, the HMO tagged a new multi-year low by breaking below long-term psychological support at the 1,200 level.

One member of the HMO that is particularly poised to suffer from an unwinding of heavy-handed bullish sentiment is Aetna (AET). The shares are off more than 37% in 2008. The security has quickly outpaced resistance at its declining 10-week and 20-week moving averages, breaking below key round-number support at the 40 level in early July. Furthermore, AET is now faced with short-term resistance in the 37 area - site of technical turbulence in September 2007.

On the sentiment front, the situation in the options pits may appear complacent, but the open interest configuration tells a different story. The current Schaeffer's put/call open interest ratio (SOIR) for AET rests at 0.66 in the middle of its annual range, suggesting a nonchalance from the speculative options crowd that is dangerous given the stock's technical troubles. Furthermore, peak July call open interest resides at the deep out-of-the-money 45 strike, totaling roughly 13,000 contracts.

On the put side of the coin, peak July put open interest resides at the in-the-money 40 strike, numbering nearly 7,000 contracts, with another 6,000 puts at the overhead July 45 strike. Below AET, there is a mere 3,500 puts at the 35 strike. This skew toward in-the-money puts indicates that investors do not expect AET to fall much further.

Elsewhere, Zacks reports that 10 of the 13 analysts following the shares rate them a "buy" or better. Downgrades could create additional selling pressure for AET, forcing the shares even lower.

Option players should consider an in-the-money (40 strike) intermediate-term put option – the August put (premium is 11% of the stock price) or October put (premium is 13.5% of the stock price) - to take advantage of this opportunity that is attractive from our Expectational Analysis ® methodology perspective.