The iShares Nasdaq Biotechnology Index (ETF) (NASDAQ:IBB) is technically tight and a move is coming. While the direction of which is uncertain I am willing to cautiously bet that it will be upwards.
After all, this is an uber-bullish equity market and it will take a really negative headline to cause a selloff, so betting long is easier than shorting. Even when we do sell off, buyers are buying every dip.
Originally I was looking to trade several biotech tickers, but the list got so long that I decided to cast a net over the sector rather than fish with a hook. This will also make managing the risk more streamlined. It came down to a toss-up between IBB and the SPDR S&P Biotech (ETF) (NYSEARCA:XBI).
Click to Enlarge I chose the IBB because it offers me bigger absolute returns with clear levels.
Other names I considered included large components of the ETF so the logic is the same but the vessel has a different ticker. Besides, selling risk on an ETF reduces the chances of a single stock headline which is common among biotech companies.
Fundamentally, the IBB carries a high ticket price but is not currently over-inflated. Four of its top six largest components have shed a lot of froth recently so they shouldn’t have far to go without a change in the macro. At almost $300 per share it’s a tall order to buy outright for most investors but using spreads delivers profits without much risk as this April trade did for me.
The weekly chart shows clear levels where markets avoid, one above $315 and the other below $250.
IBB ETF Trade Idea
The Trade: Sell the IBB Dec $245 put and collect $5.50 per contract. Here I have a 90% theoretical chance of keeping my maximum gains. If price falls below $239.50 then I accrue losses there and lower.
Usually I like to balance my trades by selling opposing risk. But since my thesis today revolves around a directional move, I will opt out from selling call risk. Instead, I could even add to the potential profits by adding more positive bias. But I will delay entry for now.
The Juice (Optional): Buy the IBB June 30 $295/$300 debit call spread for $2.30. If price rallies past my spread I stand to double my money.
While adding the optional calls may seem aggressive but it’s not. I don’t even need a rally to profit. As long as IBB stays above my sold puts, any premium I recapture from selling my debit calls spread would be pure profit.
Selling puts is risky business so I only risk what I can afford to lose.
Learn how to generate income from options 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.