Humana (NYSE: HUM) reported third-quarter income today of $302.4 million, or $1.78 per share, up from $159.2 million, or 95 cents per share, a year earlier -- an increase of 90%. Excluding special items, Humana's Q3 EPS was $1.53. Analysts were expecting earnings of $1.49 per share from the health insurance company. This morning's positive surprise lifted the stock to a new all-time high of $81.50 just after the opening bell.

Additionally, the company projected that it would add at least 200,000 members to its full-service Medicare Advantage plans. The company has an optimistic outlook for 2008, thanks to improvements in its Medicare prescription-drug plans and commercial plans for employers. The company estimated full-year 2007 earnings of $4.50 to $4.55 per share, slightly above the Wall Street target of $4.52. Humana forecast 2008 earnings of $5.30 to $5.50, also above analysts' expectations of $5.20. If you think these figures represent company strength, then now might be a good time to look at a bullish hedged trade on HUM.
The stock has traded up this year from a 52-week low of $51.00 in January to its new high today at $81.50. HUM opened this morning at $80.49. So far today, the stock has hit a low of $75.65 and a high of $81.50. As of 12:20, HUM is trading at $76.67, up $1.11 (1.47%). The chart for HUM looks bullish and steady, while S&P gives the stock a positive 4 STARS (out of 5) buy rating.

For a bullish hedged play on this stock, I would consider a December bull-put credit spread below the $60 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 6.4% return in just 2 months as long as HUM is above $60 at December expiration. The stock would have to fall by more than 27% before we would start to lose money. Learn more about this type of trade here.

HUM hasn't been below $60 since August and has shown support around $71 recently. This trade could be risky if today's earnings turn out not to be as positive as they are at first glance, but even if this happens, HUM could be protected by support from its 200- and 50-day moving averages, which are both in the mid-$60's and rising.

Meg Massie is an options analyst and writer at Investors Observer.

DISCLOSURE: At publication time, Meg owns shares of HUM.

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