Now, I’m not making a political statement here. I know I won’t win any popularity contests by saying that Donald Trump seems to be gaining in the polls. But they do indicate a legitimate chance of winning for Trump. And often enough, the blindside scenario has a tendency to materialize. Think the Brexit vote, which came out opposite to consensus.
When it comes to the markets, many on Wall Street like Hillary Clinton, but a Clinton win will be bad for biotech stocks. She’s averred several times of her intentions to pursue a crusade against Big Pharma’s price gouging. This has placed downside pressure on all related stocks and exchange-traded funds.
Click to Enlarge So, if Trump prevails in November, this pressure will be lifted, causing a spring-loaded effect in biotech stocks and ETFs. Today, I can set up a trade that would benefit from an increase in Trump’s polls numbers through the elections.
Trade #1: Go long biotech via a trade betting on the Direxion Daily S&P Biotech Bull 3X Shares (NYSEARCA:LABU). Specifically, buy the Dec LABU $53/$54 debit call spread. This is a bullish trade for which I pay 40 cents to enter. This is my maximum potential risk. If LABU rallies through my spreads in the next 88 days, I stand to double my money.
I usually like to lower my out-of-pocket expense by selling bull put positions. But in this case, I’d rather avoid doing so into an ETF that is three times leveraged.
Instead, sell the bull put spreads into a non-leveraged biotech ETF. Non-leveraged means it would be relatively more stable. Should prices move against my thesis, I would have an easier time managing the risk. The logic of choosing two different tickers is that I disperse the risk. If I am correct, I take the elevator up with LABU, but only risk taking the escalator down in case I’m proven wrong.
Trade #2: Go long biotech via the XBI SPDR S&P Biotech (ETF) (NYSEARCA:XBI): Sell Dec XBI $60/$59 credit put spread. This is a bullish trade for which I collect 25 cents to open. I need XBI price to stay above $60 per share through mid December. Theoretically, I have almost an 80% chance of success with a potential 30% yield.
Click to Enlarge As a confirmation to the thesis, the iShares NASDAQ Biotechnology Index (ETF) (NASDAQ:IBB) shows a potential technical breakout just above current level. The biotech sectors tends to trade as a collective, so a move in one causes all to move.
I am not obliged to hold these trades through their expiration dates. I can close any for partial gains or losses at any time.
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.