Biotech stocks are taking a well-deserved respite. But it’s not the type of pause that precedes a top, no. This is a pause that refreshes, a necessary breather before yet another sprint higher. Traders looking to score from the budding biotech recovery have exchange-traded funds — the SPDR S&P Biotech (ETF) (NYSEARCA:XBI) and the iShares NASDAQ Biotechnology Index (ETF) (NASDAQ:IBB) — square in their crosshairs.
Both funds offer a broad-based avenue for gaming the biotech sector without the pesky need to pick winners and losers.
Of the two, XBI has the upper hand in the liquidity department. Currently, its average daily volume sits just shy of 7 million shares while IBB’s is just below 2 million.
The liquidity disparity widens when we turn to the options market. XBI options boast tighter bid-asks and far more open interest. So do yourself a favor and avoid IBB if you’re playing in the derivatives market. Your trading account will thank you.
The Trump victory was a godsend for ailing biotech stocks. Next to financials, biotech has been one of the best-performing industries post-election. But even the strongest stocks need the occasional breather. And that, dear readers, is exactly what we’re seeing in XBI this week.
Last week’s glorious ascent carried the biotech ETF back above every major moving average. XBI has once again returned to its 2016 high. Bulls are hoping they have the mustard to finally breach the $69 resistance zone.
If you think they do, then the past few days of churn are just what the doctor ordered to set up a clean breakout play. It actually would do XBI some good if it would consolidate further before attempting the breach.
Inject Profits with an XBI Play
Implied volatility has plunged alongside the biotech stock boom, and that means options can now be scooped up on the cheap. If you’re looking for bullish exposure, consider buying the Jan $65 calls for around $5.40.
The max risk is capped at the initial $5.40 debit and will be forfeited if XBI slips below $65 by expiration. The max reward is unlimited.
Traders seeking a lower-cost way to game the biotech space could buy the Jan $65/$75 call spread for $4.10.
At the time of this writing Tyler Craig had no positions in any of the aforementioned securities.
