In the back half of 2015 we’ve seen the tide turn for biotech stocks. Once the envy of all sectors, biotech companies have seen their share prices falter as the momentum magic seems to have shifted to the technology space.
While Amazon (AMZN), Alphabet (GOOG, GOOGL), Facebook (FB), and the like have been racking up gains, biotech behemoths like Gilead (GILD), Celgene (CELG) and Regeneron Pharmaceuticals (REGN) have been dithering.
Biotech stock lovers should take heed however. Recent technical signals suggest the industry is heating up again. The improving action is easily identified using the iShares NASDAQ Biotechnology Index ETF (IBB) which boasts the previously mentioned biotech stocks among its top holdings.
IBB has carved out a series of higher pivot lows over the fourth quarter, showing a steady increase in demand. The trend reversal has been accompanied by a shift in the 50-day moving average, which now points northward. With Monday’s broad market surge, the IBB ETF was lifted right to the doorstep of a pivotal resistance level.
The $343 level has stymied each previous recovery attempt, but the current one looks like it could finally go the distance. Watch for a breakout in the coming days to signal a renewed advance is commencing for IBB.
IBB Call Spreads for Healthy Profits
The recent lack of vigor by IBB has depressed option premiums. That’s good news for those looking to buy call options in some fashion to capitalize on renewed strength out of biotech stocks.
Despite the generally low level of implied volatility, the higher price tag carried by IBB makes straight call purchases too costly. I like the idea of buying call spreads on the biotech ETF instead.
Buy the Feb $345/$360 call spread for $6.60 or better. To initiate the trade buy to open the Feb $345 call and simultaneously sell the Feb $360 call. The premium received from the short 360 call will help partially finance the purchase of the 345 call thereby reducing the overall risk of the position.
The max loss is limited to the initial $6.60 debit and will be forfeited if the biotech ETF sits below $345 at expiration. The max gain is limited to the distance between strikes minus the net debit, or $8.40, and will be captured if IBB can rise above $360 by expiration.
At the time of this writing Tyler Craig had no positions in any of the aforementioned securities.
