Major decisions around health care from the Ontario Provincial Government last week sent shares of consumer staples companies like Shoppers Drug Mart (TSX: SC) and Loblaw Cos. (TSX: L) lower. Of particular concern was the decision to reduce reimbursement rates on generic drugs. The government will now only reimburse 25% of the branded cost down from 50%. At the same time the government eliminated other subsidies and supports to pharmacies which are expected to have a significant impact on the pharmacy revenue stream.

For investors, there are a couple of points to consider. The subsidy issue may only be the first in a long line of health care reductions. Provincial governments are reeling under the weight of unsustainable debt loads, and health care has long been considered a bloated portfolio. The question is whether there will be further fallout on the affected consumer staples names.

Certainly Shoppers is a major player in this field, and will feel the pinch more than say, Loblaws. Still Shoppers like Loblaws are consumer staples giants, with strong brands, large market share, and consistent earnings. Provincial cutbacks will have a more significant impact on smaller pharmacists which, in many instances, will get absorbed by the bigger fish. On a longer term basis, you have to think that any industry consolidation that is likely to occur as a result of government cutbacks, will benefit these companies. This will be reflected in share prices at some point. The question is when?

In these situations, one strategy to look at is covered call writing or naked put writing. For a couple of reasons. First, the market has already taken a pound of flesh from these companies, which often causes option premiums to rise. And for a brief period, premiums remain at heightened levels while investors worry about whether another shoe will drop. Eventually, heightened anxiety levels wane, the stocks settle in a new trading range and option premiums contract.

This combination of events presents a potentially lucrative opportunity for investors who are willing to bet on a longer term recovery in this sector. While on a shorter term basis, want to generate tax advantaged cash flow.

With Shoppers, you could look at buying the shares at $38.25 and writing the May 38 calls for $1.35. This option is slightly in-the-money, which will provide a bit more downside protection should the shares continue to sell-off. You could also look at simply writing the Shoppers May 38 put at $1.10. With the latter strategy, you are effectively committing to buy the Shoppers shares at $38 should the put be exercised prior to the May expiry. With Loblaws buy the shares at $37.80 and writing the May 38 calls at 90 cents. Or conversely, write the May 38 puts at $1.10.