Experts estimate that health care expenses in the United States top $2.3 trillion and account for more than one-sixth of all economic activity.

Around the world, spending in this sector is about $6.5 trillion, or more than 10% of the global economy.

While the United States works to rein in the amount of money dedicated to health care, in other countries, spending is increasing.

[ad#Google Adsense 336×280-IA]One thing is clear: Countries around the world will work toward getting the most bang for every buck they dedicate to health care.

That’s where the challenge lies, and also where the opportunity lies for traders.

One of the easiest ways to save money on health care is to use generic drugs when they are available.

According to the Generic Pharmaceutical Association, generic drugs make up nearly 70% of all prescriptions in the United States, but represent just 16% of all dollars spent on prescriptions. Generic drugs are estimated to save consumers $8 billion to $10 billion a year.

Among generic drugmakers, one of the fastest growing is Dr. Reddy’s Laboratories (NYSE: RDY), a company that operates primarily in the United States, India, Russia, Germany, the United Kingdom, Venezuela, South Africa, Romania, and New Zealand.

Sales in the past 12 months topped $2 billion and RDY reported earnings per share (EPS) of $1.77. EPS growth averaging more than 22% is expected in the next five years, yet RDY trades with a price-to-earnings (P/E) ratio of 19, slightly below fair value.

Fair value for a stock is defined by some analysts as the price where the P/E ratio equals the EPS growth rate. This calculation is known as the PEG ratio. For RDY, the fair value would be about $46 based on next year’s estimated earnings of $2.11 per share. That would mean RDY is fundamentally undervalued by 39%. The chart suggests $42 is within reach, a potential gain of more than 25% from current levels. Both of these price moves are large enough to make RDY a buy.

In addition to being a great trade, I think RDY is the kind of stock that could be held for the long term. But rather than buying the stock now, traders could sell puts that have the potential to generate substantial income, and if RDY does fall, put sellers would own a value stock trading at an even deeper discount.

Put options expiring in March with an exercise price of $30 are trading at about $0.55. The margin on this trade could be as little as $6 per share, although some brokers may require a higher amount. Selling this options contract would result in an immediate return of 9.1% based on a fully margined position. If RDY is still trading above $30 when the options expire, the $55 in income received from selling the put is the total return on this trade. If RDY falls below $30, put sellers will own RDY at a cost basis of about $29.45, or 14 times projected earnings.

This is a trade that takes advantage of a global trend towards reducing costs in a growing sector. RDY offers value at the current price, but by selling puts it also offers income potential with a chance to buy it at a discount.

Recommended Trade Setup:

— Sell RDY March 30 Puts for $0.30 or more
— Do not use a stop-loss
— If RDY is trading above $30 when the options expire, the total gain will be equal to 100% of the premium received on the sale. If RDY is below $30 at expiration, this growth stock will be bought at a below average P/E ratio.

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Source: Trading Authority