After rallying alongside the broader market during October, biotech stocks are now looking mighty vulnerable. The ongoing market pullback has persisted longer than buyers would like and more weakness may be beckoning for the basket of formerly high-flying biotech stocks.
Newcomers to the biotech space should be aware that the easiest way to track the industry is through a pair of popular ETFs — the iShares Nasdaq Biotechnology Index ETF (IBB) and the SPDR S&P Biotech ETF (XBI). The roster of biotech stocks in both funds makes them effective proxies for the industry.
IBB, which will be the focus of today’s commentary boasts such stocks as Celgene Corporation (CELG), Amgen (AMGN), and Regeneron Pharmaceuticals (REGN) among its top holdings.
Though IBB stock was able to remount its 50-day moving average during its recent recovery, the bullish victory is about to be overturned if the bulls aren’t careful. One of the issues plaguing IBB owners is the heap of overhead resistance weighing on the stock.
The summer swoon that delivered a 29% haircut was sufficient in turning both the daily, and more importantly, the weekly trend lower. The significance of such a turn of events can’t be overstated. This is the first time the weekly trend of IBB has been lower since its epic ascent kickoff in with 2012 earnings.
Regardless of what you think about biotech stocks’ ultimate destination, the current perch of IBB represents an attractive low-risk entry for a tactical bearish play. If wrong, you can exit bearish plays swiftly on a break of $342 resistance. If right, IBB could revisit its September lows near $285.
Score BIG with IBB Put Spreads
One of the more attractive plays on the board here is buying January IBB put spreads. Buy the Jan $325/$310 put spread for $5.90. The put vertical spread is well positioned to profit if IBB stock takes another plunge into the abyss.
Your risk is capped at the initial $5.90 debit and will be lost if IBB sits above $325 at expiration. The reward is also capped at the distance between strikes minus the net debit, or $9.10, and will be captured if IBB sits below $310 at expiration.
At the time of this writing Tyler Craig had no positions on any of the aforementioned securities.
