Even under normal circumstances, healthcare and biotech stocks are prone to making headlines. They’ve been a political punching bag for more than a year now. First, Hillary Clinton vowed to rein in the sector policies. Now President Trump vows to restructure their pricing models. In either case, the biotech sector P&Ls are under potential pressure.
The cause of the headlines were a few bad apples in the bunch. But for the most part, these are companies with real income streams that are doing good work to heal people. So the blanket effects of any political headline should prove to be transient. Companies will survive this in the long term.
Today, I want to sell risk against extreme scenarios that are unlikely to happen. The idea is to collect a premium and let time do the work.
As long as price stays away from my sold levels the trades should expire worthless for maximum gains.
Biotech Stocks to Buy: iShares Nasdaq Biotech ETF (IBB)
Click to Enlarge The iShares Nasdaq Biotechnology Index (ETF) (NASDAQ:IBB) has settled inside a wide trading range with solid support and strong resistance.
I recently shared a winning trade in the IBB that was based on a near-term bearish technical pattern. Today, I want to simply sell risk for income against support and resistance levels that should be unattainable for a while.
The Trade: Sell IBB Sept $220 naked put for $2 per contract. To balance this trade, I will sell opposing risk with the Sept $350 naked calls for an additional $2 per contract. Taking both sides would put me in a sold strangle that has a 90% theoretical chance of success. If IBB breaches either side of my pair trade, my breakeven points would be +/- $4 from the strikes sold.
Biotech Stocks to Buy: S&P Biotech ETF (XBI)
Click to Enlarge Here is another popular biotech exchange-traded fund, the SPDR S&P Biotech (ETF) (NYSEARCA:XBI). I don’t usually like to double up on risk with the same trading vehicle, but in this case both of these funds have quite different elements.
The XBI has recently shown potential for a $7 spike, but the first attempt failed. Now it’s in danger of retesting the $61 per share area. For this trade, I will sell against those test levels betting that neither potential will come to full fruition.
The Trade: Sell the XBI Sept $61/$59 credit put spread versus the $78/$80 credit call spread. This strategy is known as an “iron condor.” It’s a range-bound trade that has an 80% theoretical chance of success to yield 70% on risk. I am comfortable managing this risk with a +/- 15% price buffer from current levels.
Biotech Stocks to Buy: Biogen (BIIB)
Click to Enlarge The Biogen Inc (NASDAQ:BIIB) monthly chart shows that as long as there is no major black swan event for BIIB’s fundamentals, the stock price is in balance for the long run with a wide trading range. There is clear support below and an emphatic rejection above. The weekly technicals leave room for upside potential and no imminent downside debacles.
Of the top five IBB components, BIIB and Gilead Sciences, Inc. (NASDAQ:GILD) show best entry points against balanced levels. I chose BIIB because the GILD downtrend is worrisome. What’s more, Amgen, Inc. (NASDAQ:AMGN) and Celgene Corporation (NASDAQ:CELG) are too close to their respective upper end of the channels.
The Trade: Sell the BIIB Oct $185 naked put for $2 per contract. This trade has a 90% theoretical chance of success. To balance the trade I will sell a half-sized October call position at $365 for an additional $2 per contract. Selling naked options is risky and I only do it if I am willing and able to suffer the losses. With this much time to expiration, I feel comfortable being able to manage the risk of short-term price gyrations.
Learn options as easy as 1-2-3 here. 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.
