It would seem that the toxicity that the iShares Nasdaq Biotechnology Index (ETF) (NASDAQ:IBB) were suffering on Wall Street is waning. Until recently, the political headlines were a threat to all healthcare and biotech stock holders. The thesis that biotech stocks are untouchable, however, is no longer the dark cloud that it was.
So can I buy the IBB long from here with confidence? Not in my opinion. I think that trading the IBB should fit into a bullish macro scenario, which we may no longer have. Equity markets are near all-time highs with few catalysts that are not yet priced in. Traders quickly priced in the fiscal spending and legislative advantage that President Trump promised. This week we saw the first promise die, so the onus is now on the bulls to prove they can deliver the rest.
Click to Enlarge So to say the least, the perfectly bullish scenario has some rebuilding to do. This creates an opportunity to take a short-term bearish bet on the IBB. I can do this without spending any out-of-pocket money.
Before you label me a bear, I am merely shorting the near-term price action and not the fundamentals of any components within the IBB. In fact, I will leverage their value to pay for my bet.
The Trade: Buy the IBB June $280/$275 debit put spread for $1.30. This is a bearish trade that could triple my money if IBB falls through my spread before mid-June. The cost of entry is my maximum potential loss. I usually like to hedge my bets, and in this case, I will sell downside risk against the value of the IBB. The trick is to find proven support zones.
The Bank: Sell the IBB Jan $200 put and collect $3 per contract. The current 30% price buffer gives this leg a 90% theoretical chance of success. As long as IBB stock stays above my January sold strike, any premium I recover from selling the June debit put spread would be pure profit. Having no out-of-pocket risk makes managing this trade relatively easy.
Fair warning: Selling puts is risky, so only do it if you are willing and able to own the IBB shares at the strike price.
Nicolas Chahine is the managing director of SellSpreads.com. Learn options as easy as 1-2-3 here. 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.
