Trade of the Day: SPDR S&P Biotech (ETF) (XBI)

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The market shot to new highs on Monday after breaking out of a short-term consolidation range, but the major indices were dragged back down yesterday as the price of WTI crude oil fell 2%. The Dow Jones declined by 61 points, or 0.3%, the S&P 500 lost 16 points, or 0.7%, while the Nasdaq dropped by 51 points, or 0.8%. The Russell 2000 small-caps underperformed the other indices with a fall of 15 points, or 1.1%.

Eight of 10 S&P sectors closed in the red yesterday, with consumer discretionary and energy registering the biggest declines, while health care and utilities rose mildly. The fall in energy stocks was catalyzed by reports that oil production in Nigeria and Libya, two of the OPEC nations that are exempt from the production-cut deal, increased in May.

Meanwhile, one particular group is showing bullish action — the biotechs. The SPDR S&P Biotech (ETF) (NYSEARCA:XBI) hit a new 52-week high of $76.60 on Tuesday before easing back slightly to about $75. And I’m opting to employ one of my preferred bullish strategies here: a naked put write.

Sell to open the XBI July 21st $67.50 put at about $0.31.

Note: There are several July expirations available for XBI options. Be sure you are opening the monthly options that expire on Friday, July 21, 2017.

The ideal scenario for a naked put write is for the price of the underlying stock to increase. However, when you write puts that are significantly out-of-the-money, the odds are on your side either way; all you need is for the stock to remain above your strike price.

With that in mind, we’ll collect our put premium today and look to keep holding as long as XBI remains above $67 through expiration on July 21.

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Ken Trester is editor of the popular Maximum Options program. Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990.

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