Turning Drawdowns Into Opportunity: $UNH, Covered Calls, and Your Next Move

Last week in New York City, I had the privilege of joining my new friend Jared Blikre at the Yahoo Finance set to discuss a popular options strategy—the Covered Call.

Click here to watch the short segment.

A covered call is simply when you own shares of a stock and then sell a call option on those same shares. In plain English: you’re agreeing to sell your stock at a certain price (the strike price), usually higher than the current price, in exchange for some extra income upfront (the option premium). You keep the premium no matter what happens.

For this segment, I highlighted United Health Group ($UNH) as an ideal candidate for a covered call strategy.

Right now, $UNH is experiencing a steep drawdown—a tough period where the price has dropped significantly. However, it looks like this decline may be running its course. What’s interesting is that options premiums are high at the moment, meaning I can sell calls at strike prices that are relatively far away (above the current share price) and still collect about 1% of the stock’s value in premium. Plus, there’s a dividend payout coming on September 15th.

Let’s be clear: if $UNH continues to crash, the covered call won’t protect you from those losses. Yes, the premium you collect will help a little by lowering your cost basis, but it won’t be much comfort if the stock keeps tumbling.

But if the stock stabilizes from here, this strategy lets me keep selling “out-of-the-money” calls every month, earning consistent income and collecting those dividends as well.

And if the stock does rebound and climbs above my strike price, I’ll profit from the stock’s rise up to the strike price—plus I’ll keep all the premium income from the options I sold and any dividends received along the way.

A covered call done right: a win, win, win.

As summer trading comes to a close, now’s the perfect time to rethink your strategy heading into the final stretch of the year. Do you have a plan in place to profit if there’s a year-end rally? If you want to trade alongside a dedicated community of smart, risk-aware options traders—who plan for profit and don’t leave outcomes to chance—click here to join us. Let’s capitalize on the next big move together!

Sean McLaughlin | Chief Options Strategist, All Star Charts