Actionable trade ideas for stock market investors and traders seeking alpha by overlaying their portfolios with options, other derivatives, ETFs, and disciplined and applied Game Theory for hedge fund managers and other active fund managers worldwide. Ryan Renicker, CFA

1. U.S. Listed Options Sales Thursday, July 30, 2009
Market Commentary
Ryan Renicker, CFA
(646) 557-7999 Health Care Reform: A Disease Relative Value
John Martin
(646) 557-7724
For Managed Care Stocks? ALERT
Health Care Reform Uncertainty = Volatility in Managed Care Stocks
• Investors in the Health Care sector are keeping a close eye on Washington as Congress continues to hash out
details on Health Care Reform legislation.
• The uncertainty generated by this ongoing debate in Congress – including the probability of Congressional
approval of government-run Health Care legislation and the potential impact such legislation could have on
companies competing in this space – continues to mount.
• For example, the rolling 22-trading day realized volatility for the S&P500 Managed Health Care Index
(S5MANH Index) has soared more than 50% (13 vol. points) during the past 7 days alone (from its 52-week low
of 26.6% on July 22 to 39.4% on July 30).
• During this same 7-day period, the 22-trading day realized volatility for the S&P500 Index (SPX Index) has
remained virtually unchanged (from 20.93% on July 22 to 21.6% on July 30).
Performance of Managed Care Stocks Impacted by Probability of Reform Passage
• We also observe a distinct negative relationship between the performance of Managed Care stocks and the
estimated probability that a government-run health care insurance plan will ultimately be approved by
Congress and signed into law (Figure 1.)
• According to the Rasmussen Reports Daily Presidential Tracking Poll (www.rasmussenreports.com), which is
based on a sample of likely voters, “Just 23% believe health care costs will go down if health care reform is
passed. Most (53%) expect prices would rise and 50% expect the quality of care would decline.”
Trading Opportunities
• As the debate for Health Care reform continues, the performance and volatility of Managed Care stocks is
likely to remain significantly impacted by developments in Washington regarding Health Care reform.
• For option traders, consider buying straddles/strangles in Managed care stocks such as Aetna (AET), CIGNA
(CI), Coventry Health Care (CVH), UnitedHealth Group (UNH) and WellPoint (WLP) vs. short straddles/strangles
in the SPY (S&P500 ETF). Maximize gamma by trading the August or September line.
• Investors in cash equities should consider a long/short position in a basket of Managed Care stocks vs. the
SPY.
• Please call to discuss additional insights on ways to structure these trades (and other ideas on the back of this
theme) tailored to fit your specific investment objectives and maximize your return/risk profit potential.
Figure 1: Managed Care, SPX Relative Performance vs. Probability of Govt. Run Health Insurance Plan
114 50
ovt. Run Health
Insurance Plan Approved by 12/31/09
112
S&P 500 Managed Care Index
vs. SPX Relative Performance
45
110
108
Intrade Est. Probability G
40
106
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30
100 Strong Inverse Relationship
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Managed Health - SPX Relative Return Intrade Market (Health Care)
Sources: Newedge Listed Options Sales, www.intrade.com