Stocks were met with weakness across the board in Wednesday’s trading session, but the biotech sector remained, once again, immune to selling pressure.
Honestly, biotech stocks are on a completely different planet — one where gravity has been banished and bears are an endangered species.
Amid yesterday’s mild downturn, the popular iShares NASDAQ Biotechnology Index (ETF) (NASDAQ:IBB) notched yet another all-time high at $341.93 before falling back into the close. The relative strength in the IBB ETF looks better than ever and days like Wednesday simply reinforce its reputation as the leading market sector.
Someday the biotech boom will suffer the same fate as all parabolic runs. That is, the return of vicious volatility and hair-raising drawdowns. Good luck mastering the timing though. Picking tops is notoriously difficult.
Besides, the trend in IBB looks solid so why not make hay while the sun is shining?
Our last foray into the IBB ETF resulted in a bull call spread suggestion which has largely played itself out — and scored a hefty profit, I might add.
With IBB boasting a clean high base pattern, the time is at hand for another bullish play.
Capitalize on IBB Upside With Call Spreads
Bull call spreads remain my strategy of choice for IBB. The high share price of IBB rules out long calls for all but the most degenerate of gamblers. And the low implied volatility dampens the appeal for short premium strategies.
The tricky decision is which expiration month to use. April options would be the more aggressive choice delivering profits (or losses) quicker. Since May options aren’t currently available those wanting more time in the spread would have to use June options.
Pick your poison. I’ll elect for April in today’s trade suggestion.
Buy the Apr $340/$350 call spread for $4.90. The maximum risk is limited to the initial debit paid and will be lose if IBB sits below $340 at expiration.
The maximum reward is limited to the distance between strikes minus the net debit, or $5.10, and will be captured if IBB can rise above $350 by expiration.
Be forewarned the bid/ask differential in IBB ETF options is really wide, so limit orders are a must.
At the time of this writing Tyler Craig had no positions on any of the aforementioned securities.
