Biotech stocks are broadly taking it on the chin in Tuesday’s trading. The phrase “it’s not just Valeant” has echoed across social media, and it’s true — the iShares NASDAQ Biotechnology Index (ETF) (NASDAQ:IBB) and the SPDR S&P Biotech (ETF) (NYSEARCA:XBI) are off around 2% each right now.
And a look at the charts show that both IBB and XBI could be in for further pain here in the short-term. So right now, traders could look to make profits on short plays on one, the other or both.
(As a note before we go any further: I’m currently a long-term IBB holder, and I don’t intend to change that. These are just a few ideas for hedging the short-term weakness.)
IBB has been sinking for more than a week after plunging back through its 50-day moving average. The stock has put together a double-top formation, sinking back to around the $255 level that it found in both May and early April.
There’s a little more room to fall to price support between $245-$250, which IBB has bounced off of at several points this year. However, should that break, next price support sits at 2014 lows near $215, which would mean a 15% drop from here.
Considering that, and weak-but-not-oversold RSI, you could consider going short here, either directly or via puts. On the put side, one play might be the July $245 puts, going for $4.60, which would put your breakeven at $240.40 — so you’d need just a 5% drop to be in the money. Extremely bearish traders could put less up front with the $225 puts for 98 cents. There, you’d need an 11% drop, with the hope that IBB would fall to those 2014 lows.
XBI is in a similar pickle, with shares having recently breached the 50-day MA amid a double-top pattern that’s not quite as clean as IBB’s. In truth, the short case for XBI isn’t as strong, and shares have a couple more support layers to get through on the way to a double-digit-sized plunge.
One possible trade here would be a July $53/$48 put spread, buying the former put for $2.15 and selling the latter for 59 cents for a total cost of $1.56. Breakeven would be at $51.44, which is less than 3% lower from here. Maximum gain would be $3.24, which you’d achieve if XBI drops below its May lows.
Both ETFs were making slight bounces from their lows as of this writing, so before entering in any trade, you’d do well to see if both IBB and XBI firm up off the bottom.