Encompass Health Plummets 10%—What’s Driving the Freefall?

• Encompass Health (EHC) collapses 9.7% intraday to $108.06, hitting a 52-week low of $82.74 earlier this year
• NY Times exposes fatal patient errors at Encompass facilities, sparking regulatory scrutiny and operational concerns
• Sector leader Select Medical (SEM) also dips 2.7%, but EHC’s freefall outpaces broader healthcare trends

Encompass Health’s stock has cratered over fears of systemic safety failures at its rehab hospitals, with the NY Times’ damning report igniting a sell-off that erased nearly $600 million in market cap. The 9.7% plunge—sharpest since 2023—underscores investor panic as regulatory risks collide with operational transparency concerns.

Patient Safety Scandals Ignite Regulatory Backlash
The stock’s collapse stems directly from the NY Times’ exposé detailing fatal carbon monoxide poisoning, medication errors, and bed alarm failures at Encompass facilities. Federal regulators’ lack of punitive measures or public disclosure mechanisms has amplified investor fears of long-term reputational damage and potential legal liabilities. With 248,000 annual admissions and a 11% net profit margin, Encompass’ business model hinges on rehab facility safety—now under existential scrutiny after revelations of preventable patient deaths linked to systemic operational flaws.

Bearish Bias Dominates—Options Highlight Downside Risk
EHC Options Chain and technicals reveal extreme bearish sentiment:
• Rsi: 47.56 (neutral)
• Bollinger Bands: Current price ($108.06) below middle band ($119.85)
• MACD: Negative divergence (-0.08 vs signal line 0.28)
• 200-day MA: $103.87 (support level)

Traders should focus on EHC20250815C115 (call) and EHC20251219P95 (put) for volatility plays:

EHC20250815C115 (Strike $115, Exp Aug 2025):
• Delta: 0.29 | Gamma: 0.03 | Theta: -0.09 | IV: 34.56%
• Turnover: $195,070 (liquidity advantage)
• Leverage: 56.70%
• Trade Edge: Sells at 74% premium contraction—prime for shorting calls into potential rebounds.

EHC20251219P95 (Strike $95, Exp Dec 2025):
• Delta: -0.23 | Gamma: 0.01 | Theta: -0.02 | IV: 35.20%
• Turnover: $3,755 (moderate liquidity)
• Leverage: 28.35%
• Trade Edge: Deep out-of-the-money put with asymmetric risk/reward—ideal for bearish bets on long-term regulatory fallout.

Payoff Scenario (5% downside to $102.65):
- EHC20250815C115 payoff: $0 (out of money)
- EHC20251219P95 payoff: $1.35 per contract ($95 - $93.65)

Action Hook: Aggressive bears should layer puts at $95-$100 strikes while monitoring 200-day MA ($103.87) for potential rebounds.

Backtest Encompass Health Stock Performance
The backtest of EHC's performance after a -10% intraday plunge shows mixed results. While the 3-day win rate is 50.53%, the 10-day win rate is slightly lower at 49.65%, and the 30-day win rate is 48.24%. This indicates that EHC tends to recover moderately from such significant dips, but the returns are generally modest, with a maximum return of only 0.17% over 30 days.

Regulatory Crossroads—EHC Faces Existential Reckoning
Encompass Health’s freefall won’t stabilize until it addresses systemic safety failures and regulatory scrutiny. While sector leader Select Medical (SEM) holds up better (-2.7%), EHC’s operational transparency and profit margins are now under a microscope. Watch for:
• CMS enforcement actions beyond mere compliance warnings
• Q3 earnings guidance revisions reflecting reputational damage
• Option volatility contraction signaling bottoming

Investors should prioritize downside protection—use puts at $95 strikes to hedge until operational clarity emerges. This isn’t just a stock correction—it’s a sector credibility test.