Goldman Sachs Says Buy Health-Care Options on Elizabeth Warren's Surge

(Bloomberg) -- Investors should use options to hedge against the rising prospects of Elizabeth Warren’s bid for the Democratic presidential nomination as that risk seems to be underestimated in the market, according to Goldman Sachs Group Inc.

Options on the $17 billion Health Care Select Sector SPDR Fund, known by its ticker XLV, are particularly attractive, analysts led by John Marshall wrote in a research note. The fund’s implied volatility, a gauge of options prices, is around a five-year low compared with the S&P 500, the firm’s data showed.

Health-care shares have trailed the market this year amid concern potential regulations on drug pricing will hurt industry profits. A weekend poll showed Warren, the senator from Massachusetts who supports replacing private health-insurance with a government-run system, in a statistical tie with former Vice President Joe Biden, who favors a more conservative approach that would keep private insurance and include a public option.

That’s creating “incremental fundamental uncertainty” for health-care investors, Marshall wrote, noting that shares of health insurers in particular have started to show a strengthening relationship with Warren’s rise. “Healthcare is likely to have an outsized reaction to swings in election sentiment.”

The analysts recommend using an at-the-money straddle strategy -- buying equal numbers of calls and puts with the same strike price and expiration date -- to take advantage of any increase in volatility. Specifically, they advise buying the November $92 XLV calls and puts at $3.83 for each contract.

“These options capture the Oct. 15-16 Democratic debates and may capture a November debate,” the analysts wrote.

They also advise investors to “own volatility” in individual stocks ahead of specific catalysts. Those to watch before the year ends include:

• Data from Mirati Therapeutics Inc. in the fourth quarter, after the stock more than doubled year-to-date on Amgen Inc.’s results in a hot cancer target known as KRAS.
• First forecasts from managed-care companies including UnitedHealth Group Inc., Anthem Inc. and Cigna Corp. “will address concerns about 2020 growth expectations and cost trends.”
• Data in blood cancer from partners Bluebird Bio Inc. and Celgene Corp. may help investors decide if Bristol-Myers Squibb Co. will need to make an extra payout in its deal for Celgene.
• Other catalysts include clinical data from BioMarin Pharmaceutical Inc., Biogen Inc., Blueprint Medicines Corp., FibroGen Inc., Seattle Genetics Inc. and Sage Therapeutics Inc.

To contact the reporters on this story: Cristin Flanagan in New York at cflanagan1@bloomberg.net;Gregory Calderone in New York at gcalderone7@bloomberg.net

To contact the editors responsible for this story: Catherine Larkin at clarkin4@bloomberg.net, Richard Richtmyer, Lu Wang

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