An options trade that wins if UnitedHealth bounces after its sharp sell-off

CNBC

27-05-2025

UnitedHealth has been at the center of controversy and negative sentiment, resulting in an eye-popping 60% drop in less than 30 days. For a company of this size — and the largest component of the Dow Jones Industrial Average — such a dramatic decline is astounding. This is a textbook example of how markets often behave: they swing to extremes, both to the upside and downside. These exaggerated moves regularly create mean reversion trading opportunities, many of which I explore in depth in my book Mean Reversion Trading and feature extensively on my website . Now, while a massive drop like this doesn't automatically signal that a reversal is imminent, it certainly warrants adding UNH to your watchlist for a potential high-reward trade setup. The key question becomes: how do you identify when an extreme move has run its course and the stock is ready to revert to the mean? This is where technical analysis comes into play. It removes the guesswork and offers a data-driven way to time entries. When paired with disciplined trade management, it allows you to trade even the most fear-driven market moves with confidence. For this potential setup on UNH, I'm going to walk through a few key technical indicators to evaluate whether a mean reversion is taking shape. RSI: One of the simplest and most effective indicators we can use is the RSI (relative strength index). When RSI falls below 30, it signals that a stock or ETF is in oversold territory. However, this alone is not an immediate green light to go long. The key is patience. After RSI drops below 30, traders should wait for it to rise back above 30 before taking a bullish stance. This move signals that selling pressure is easing and the potential for a mean reversion trade is increasing. It's important to remember that just because RSI is oversold doesn't mean the stock will bounce right away — oversold conditions can persist. In the case of UNH, RSI has remained oversold for over a month, which is highly unusual for a stock of this caliber. The right opportunity will come when RSI finally crosses back above the 30 level, confirming that buyers are stepping in and the worst of the selling may be over. Another indicator I rely on is MACD (Moving Average Convergence Divergence), which I use in two different variations. The standard MACD setting of (12,26,9) is widely used but is a lagging indicator — it often generates signals late, which can result in missed trading opportunities. To address this, I also use a fast MACD with settings (5,13,5). This version responds more quickly to price changes and can offer earlier entry signals. A bullish crossover occurs when the MACD line (blue) crosses above the signal line (yellow). This already happened on May 19, indicating a potential shift in momentum. While an aggressive trader might act on this fast MACD crossover alone, a more conservative and disciplined approach is to wait for RSI to confirm the signal by crossing back above the 30 level. For this particular trade, we're not using the regular MACD (12,26,9) to time the entry, but it still serves as a valuable reference for the long-term trend. Once in the trade, as long as the MACD line remains above the signal line, it suggests that the uptrend is intact. Conversely, if the MACD line crosses below the signal line again, it can be used as a cue to manage the trade or exit a losing position. The trade setup: UNH 295-300 bull call spread For a bullish trade on UNH, I'm using a trade structure called a bull call spread. This involves buying a $295 call and selling a $300 call as a single unit. It's important to understand that waiting for confirmation from indicators like RSI often means entering the trade at a higher price point, as the stock may have already started to move up. However, the beauty of vertical spreads is their flexibility — you can always adjust the strikes to fit the new price level. For instance, once RSI crosses above 30 and if UNH is trading at $303, you could consider constructing a 300–305 bull call spread instead. The mechanics remain the same — the goal is to profit from a tiny move higher while keeping risk defined. Here is my exact trade setup based on current UNH price: Buy $295 call, June 20 expiry Sell $300 call, June 20 expiry Cost: $250 Potential Profit: $250 If UNH trades at or above 300 by the expiration date, this trade will yield a return of 100% on the amount risked. With 10 contracts, this equates to risking $2,500 to potentially gain $2,500. -Nishant Pant Founder: https://tradingextremes.com Author: Mean Reversion Trading YouTube, Twitter: @TheMeanTrader DISCLOSURES: Nishant has a bull call spread on UNH expiring June 20. 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