Biotech stocks are making a comeback. And why shouldn’t they be? If there was ever a time for a beaten-down industry to beckon to buyers, it would be now, when the denizens of the street are giddy about stocks. Rather than pick winners and losers in the space, let’s focus on playing the entire biotech basket with the SPDR S&P Biotech (ETF) (NYSEARCA:XBI).
Once upon a time, XBI was the belle of the ball. Investors couldn’t get enough of the industry, especially from 2012 to mid-2015. Finally, after about a 350% gain, sentiment soured, and profit-taking struck the sector with a vengeance. XBI fell from $90 to $45 before the bloodletting finally stopped.
Since then, biotech stocks have underperformed the rest of the market. But with their technicals turning higher, perhaps the return to relative strength is nigh. XBI tagged a new 52-week high following yesterday’s Federal Reserve-induced surge. And its trend has taken on a decidedly more bullish tone.
All major moving averages are pointing higher, and a solid series of higher highs and higher lows has developed. Volume patterns are also weighing for buyers here.
Distribution days have been few and far between, showing little enthusiasm from sellers.
Prepare to Inject Profits with an XBI Trade
Implied volatility for XBI options remains depressed like the rest of the universe. And that makes a long option play the way to go. Buy the June $72 call for around $4.20. If you want to cut the cost (and risk), you could sell an April $76 call against it for about $1. This creates a June/Apr $72/$76 diagonal call spread for a net debit of $3.20
The max loss is limited to the initial $3.20 cost and will be forfeited if XBI sits below $72 at June expiration. Since each option expires in different months the max gain is a bit of a moving target. If the biotech ETF rises over $75 in the weeks ahead, you should be able to grab a $100 profit with ease.
At the time of this writing, Tyler Craig had no positions in any of the aforementioned securities.
