Despite the recent drubbing in stock land, buyers remain in control of a few select areas.
One place in which their dominance is undeniable is the biotech space. Indeed, biotech stocks — particularly those of the smaller variety — have escaped the selling sortie with uptrends intact. Look no further than a chart of the SPDR S&P Biotech (ETF) (NYSEARCA:XBI) for confirmation (shown below for your viewing pleasure).
Quick aside: the biotech industry boasts two liquid exchange-traded funds for traders to dabble in. In addition to the aforementioned XBI there’s also the iShares NASDAQ Biotechnology Index (ETF) (NASDAQ:IBB). Since IBB is laced with heavy hitters in the drug space, consider it your go-to ETF for playing large caps.
Amgen, Inc. (NASDAQ:AMGN), Biogen Inc (NASDAQ:BIIB) and Celgene Corporation (NASDAQ:CELG) are among its top holdings. In contrast, the lion’s share of XBI sits in biotech stocks of the mid- to micro-cap variety.
XBI sits atop a rising 50-day and 20-day moving average, suggesting its short-term trends still point higher. The past two months of chop have taken on the form of a base which, if broken, will morph into a launchpad for the fund’s next ascent.
Further buttressing a bullish view of XBI is the absence of any major down days this month. And that despite a broader market pockmarked by distribution days. With the biotech ETF now testing the upper end of its base, a breakout seems imminent.
The XBI Trade
Two considerations come to mind when sizing up biotech stocks for a potential trade. First, widespread weakness elsewhere may dampen XBI’s ability to capture major upside in the weeks ahead. As such, a less aggressive, higher-probability play may be the way to go.
Second, despite the recent volatility spike inflating option premiums across the board, XBI volatility remains somewhat subdued. Throw it all together and a bullish calendar spread becomes an attractive choice.
Buy the Dec $63 call while selling the Oct $67 call for $3.54. The max loss is limited to the initial debit and will be forfeited if the fund falls significantly from here. The max gain should be around $200 if XBI sits right at $67 come October expiration.
At the time of this writing Tyler Craig had no positions on any of the aforementioned securities.
