The ranks of the aggrieved are littered with biotech stocks. From Celgene (CELG) and Gilead Sciences (GILD) to Regeneron Pharmaceuticals (REGN) and Biogen (BIIB), biotechs are being jettisoned from portfolios en masse.
The reversal of fortune for biotech stocks is a perfect illustration of how high-beta, momentum stocks can move swiftly in either direction. Why? Because when the market goes risk-off, these investments often are the first to be thrown to the wolves.
To chronicle the ongoing biotech stock bloodbath look no further than the iShares Nasdaq Biotechnology ETF (IBB) which has been crowned the king of biotech ETFs.
The first shot was fired during the August crash, when IBB initially breached its 200-day moving average. The biotech ETF hasn’t been the same since. Although, IBB did cobble together a nice little ascending triangle in the fourth quarter, but the selling salvo greeting investors at the turn of the year quickly killed the bottoming attempt.
At $258, the IBB ETF now sits 36% off its highs and is down 24% year-to-date. But with the strong bullish reversal Wednesday morning, IBB is sporting a nice potential bottoming candle.
Perhaps biotech stocks can finally mount a counter-trend rally, but that should be taken with a grain of salt. The looming overhead mountain of resistance makes any and all rebounds selling opportunities.
Put Spreads Beckon to Biotech Bears
With that said, you can cash in on any additional weakness in the biotechs by buying put spreads. In layman’s terms, a put spread is a lower-cost alternative to shorting IBB shares outright.
Buy the March $270/$250 put spread for $9 or better. The risk is limited to the initial $9 debit and will be forfeited if IBB sits above $270 at expiration. The max reward is limited to the distance between strikes minus the net debit, or $11, and will be captured if IBB can fall below $250 by expiration.
Those unwilling to chase biotech stocks into the abyss could wait for some type of bounce in the coming days, and then buy the put spread. The price should be a lot cheaper following a couple “up” days in IBB.
At the time of this writing Tyler Craig had no positions in any of the aforementioned securities.
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