The biotech industry had a rough 12 months. First the beatings came from presidential hopeful Hillary Clinton as she vowed to crush their pricing models. Now President Donald Trump is following up with similar promises.
For a long while, tickers like the iShares Nasdaq Biotechnology Index (ETF) (NASDAQ:IBB) were toxic to investors. The thesis was that healthcare and biotech companies were untouchable with the political cloud looming above them.
Recently, and in spite of the fact that that nothing has changed from the political standpoint, the worrisome headlines became stale and lost their zing. That’s what usually happens. Traders initially over-react to the headline and then after a while, return to trading the fundamentals.
The companies in the IBB have legitimate, viable businesses. This is a classic case of a bad apples who spoil the bunch.
Technically the IBB stock price is in a breakout that I rode higher on Feb. 11 with debit call spreads.
The important price action came when the IBB reclaimed the $280 per share pivotal zone. From here at the $300 per share level, it can once again provide a base from which to mount another leg higher. This area is an important long term pivot level so has the potential to be a solid base once it is cleared.
Click to Enlarge The ongoing IBB measured move has more upside potential, but there is also resistance looming above. What’s important to me as a premium seller is to find areas where price is not going so I can safely sell risk for income.
Now that Wall Street is repricing the IBB where it should be in spite of the headlines, I want to sell downside risk.
Finding the right level can be tricky. Biotech companies are susceptible to big moves on surprise headlines. Even though the IBB risk is spread among its components, they tend to trade in unison. So if one component of the IBB moves on a headline, the rest would follow in sympathy. This makes trading IBB via sold premium as risky as a single momentum headline stock.
IBB Trade Idea
The Bullish Trade: Sell the IBB Jan 2018 $255/$250 credit put spread. I collected $1 per contract to open which would be a 25% yield on risk if I win. The 15% price buffer gives this trade an 85% theoretical chance of success.
Usually I like to hedge my bet. In this case I will sell opposite risk so to balance the trade. There is no rush to do so in this uber-bullish markets. So I could delay entry until I see an abatement in the exuberance over biotech stocks.
The Hedge (optional): Sell the IBB Jan 2018 $355/$360 credit call spread. I collect an additional $1 per contract to open.
If I take both sides then I would be in a sold iron condor where I need IBB to stay between $255 and $355 per share. If IBB stays in the range, this trade would yield over 60% on money risked.
I am not required to hold my options trades open through expiration. I can close either at any time for partial gains or losses.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.
