The company we review in this report provides value-based care exclusively to Medicare eligible patients, and it is improving outcomes and reducing costs. The business is attractive as a long-term investment, however it is setting up nicely for a high-income-generating options trade. We believe the trade described in this report is an attractive one to place today and potentially over the next few trading sessions, as long as the underlying share price doesn’t move too dramatically before then.
Oak Street Health (OSH)
Oak Street Health, Inc. (OSH) operates a network of primary care centers to deliver value-based care exclusively to Medicare eligible patients in medically-underserved communities. It currently operates over 75 centers in 11 states in the US, serving over 100,000 patients. The company’s revenue is growing rapidly, and it has a large total addressable market opportunity to keep growing rapidly. You can read our previous full report on the company here.
OSH Share Price:
The Trade:
Sell Put Options on OSH with a strike price of $55 (~8.4% out of the money, it currently trades at ~$60.02), and an expiration date of July 16, 2021, and for a premium of at least $0.35 (or $35 because options contracts trade in lots of 100). This comes out to approximately 0.64% of extra income just over 2 weeks—which may not sound like a big return—but it is a lot for such a short time frame (it’s approximately 13.7% of extra income on an annualized basis, calculated as ($0.35/$55) x 365/17 days). And this trade not only generates attractive upfront premium income for us now, but it gives us a chance at buying shares of this attractive long-term company at a dramatically lower price ($55—the strike price) if the market price falls below $55 and the shares get put to us before this option contract expires in about 2 weeks. And we get to keep the upfront premium income no matter what.
Important to note, your broker will require you to keep $5,500 of cash in your account ($55 strike x 100 shares) to secure the trade (assuming you don’t want to use margin).
Also important to note, you can adjust the strike price of this trade (for example to $60) depending on how badly (and at what price) you want the shares put to you, and to generate a different amount upfront income as shown in the table above). You can also consider the August contract as well (bearing in mind that expiration date is after the next earnings announcement).
Your Opportunity:
We believe this is an attractive trade to place today, and potentially over the next few trading days, as long as the price of OSH doesn't move too dramatically before then and you’re able to generate enough premium income to your liking.
Our Thesis:
We like this trade for two reasons. First, OSH is an attractive long-term business (very high revenue growth, large total addressable market), and we’d be happy to own, especially if they fell to our strike price on this trade.
Second, the shares are setting up nicely from a technical and volatility standpoint. In particular, we like to sell put options on a down day for the share price (such as today) because that’s when fear and subsequently premium income available are higher (i.e. more upfront cash in your pocket). OSH has been trading in an upward sloping range since last fall (see our earlier price chart), and these put options will potentially allow us to pick up shares at the lower end of the range, and definitely allow us to keep the premium income generated—no matter what (if the share get put to us, we like them as a long-term investment).
Important Trade Considerations:
Two important considerations when selling put options are ex-dividend dates and earnings announcements because they can both impact your trade. In OSH’s case neither one is a concern because OSH doesn’t pay a dividend, and because it isn’t expected to announce earnings again until August (after this trade expires). If the company announced earnings before this contract expires—that would add significantly uncertainty risk to the trade, and we’d have to take that into consideration when deciding what amount of premium we’d be willing to accept. As the trade stands, the high premium income more than compensates us for the volatility risk, in our view (especially considering if the shares get put to us, we like them as a long-term investment).
Conclusion:
OSH is an attractive business. It has a very high growth rate, a large market opportunity and the shares are reasonably priced. However, the shares are volatile, and current maketwide volatility only adds uncertainty to the near-term share price. For these reasons, we believe the trade described in this report is attractive. Specifically, it puts a significant amount of upfront premium income in your pocket right away (that you get to keep no matter what) and it also gives you a chance to pick up shares of this attractive business at a significantly lower price if they fall below the strike price and get put to you before the options contract expires in just over two weeks.