Biotech bulls scored another victory in Tuesday’s trading session by driving the iShares NASDAQ Biotechnology Index (ETF) (IBB) to a new all-time high.
Not that we should be surprised. You and I lack sufficient digits to count the number of new highs the biotech sector has gained in the past few years. The rise has been relentless to say the least.
Yesterday’s surge in IBB was accompanied by a rally to new heights in its relative strength, reflecting its ongoing outperformance of the S&P 500.
Would-be buyers of the IBB ETF ought to be eyeing this breakout with interest. For the past six weeks the biotech sector has been in consolidation mode. These pausing periods are a necessary pit stop along the highway to higher prices. They allow overheated stocks the ability to work-off overbought conditions as well as the occasional bouts of profit taking.
Since these breakouts signal that the consolidation phase has ended and a new advance is upon us, they represent more strategic entry points for bullish trades.
Trade IBB on the cheap with options
In light of its multi-year ascension the IBB ETF has become quite pricey at $323. However, traders shouldn’t allow the price tag to become a deterrent. The options mart offers all sorts of low-cost alternatives to buying underlying shares of the fund.
Let’s take a look at a spread that allows you to double your money for less than the price of buying two shares of IBB.
Buy the March 320/330 call vertical spread for $4.30. The max loss is limited to the initial cost of $4.30 and will be incurred if IBB sits below $320 at March expiration.
The max gain is limited to the distance between strikes minus the net debit, or $5.70, and will be captured if IBB can rise above $330 by expiration.
By using March expiration we’re giving the IBB ETF a couple months to make the necessary rise to $330. Should the current breakout fail we still have time for the longer-term uptrend to exert its influence and eventually take the fund higher.
At the time of this writing Tyler Craig had no positions on any of the aforementioned securities.
