Why I’m Shorting UnitedHealth: Dead Cat Bounce Meets DOJ Heat

A bearish trade setup after a weak rally followed allegations of fraud

• UnitedHealth Group, once a stalwart in the healthcare sector, is navigating a storm of legal and reputational challenges.
• Revelations about its Medicare Advantage practices have attracted regulatory scrutiny and shaken investor confidence.
• While the stock has briefly rebounded, I view this as a classic dead cat bounce—a temporary recovery before further decline.
• Let’s delve into the reasons behind my bearish stance and outline a defined-risk options strategy to capitalize on the anticipated downturn.

The Department of Justice is investigating UnitedHealth Group (UNH) for Medicare fraud related to its Medicare Advantage business practices. The company allegedly incentivized nursing homes to reduce hospital transfers, potentially compromising patient care. Meanwhile, the abrupt resignation of CEO Andrew Witty amid these controversies has added to investor concerns.

The gravity of the allegations against UnitedHealth cannot be overstated. A Guardian investigation revealed that the company secretly paid bonuses to nursing homes to reduce hospital transfers of residents, a practice that may have led to delayed or denied care for patients in need. These incentives were tied to metrics like "admits per thousand," effectively rewarding facilities for minimizing hospitalizations, regardless of patient needs.

Compounding the issue, the DOJ is conducting a criminal investigation into UnitedHealth's Medicare Advantage billing practices. The probe focuses on whether the company manipulated diagnosis codes to inflate payments from Medicare, a tactic that, if proven, could constitute significant fraud.

These developments not only have legal implications but also pose substantial reputational risk, potentially eroding trust among patients, providers and investors.

Signs point to a bearish outlook

From a technical standpoint, UnitedHealth's stock exhibits characteristics typical of a dead cat bounce. After the controversies triggerd a sharp decline, the stock attempted a recovery but failed to break through the $320–$325 resistance zone. This inability to reclaim previous support levels now turned resistance suggests a lack of bullish momentum.

Additionally, volume analysis indicates the recent uptick was not supported by strong buying interest, further reinforcing the bearish outlook. Momentum indicators such as the relative strength index (RSI) and moving average c onvergence Divergence (MACD) also reflect weakening bullish signals, aligning with the thesis of an impending downturn.

Capitalize on the downside with a bear call spread

To position tactically for a potential decline in the company’s stock price, I’m employing a bear call spread: Sell the $320 call and buy the $330 call (June 20 expiry) for a net credit of $3.30.

The maximum Profit would be $330 per contract, realized if the company closes at or below $320 at expiration. Maximum Loss would come to $670 per contract, incurred if the stock closes at or above $330 at expiration. The break-even point would be $323.30.

This strategy offers a favorable risk-reward profile, allowing for profit if the stock remains below the $320 resistance level, while capping potential losses.

UnitedHealth's current predicament is marked by legal investigations and leadership instability. The technical indicators corroborate the fundamental concerns, painting a picture of a stock poised for further decline. By implementing a bear call spread, I can strategically position myself to benefit from the anticipated downturn while managing risk effectively.

Errol Coleman appears on the tastylive network shows Today’s Assignment and Trades on the Go.

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