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This morning I am recommending a bullish trade on the iShares Nasdaq Biotechnology ETF (NASDAQ:IBB).
I like the biotech sector, and it has generally been holding up well during the recent volatility.
Though it was hit hard early last week along with the rest of the market, the IBB has a lot of support at the $100 level. I don’t expect it to drop below that level in the near term.
If we look at the chart of IBB above, we can see that the 200-day moving average (blue line) acted as resistance during the stock’s latest rally back to $111.
This was the second time in a month the stock failed to break above the $111 level…
However, it also has very strong support just above the $100 level going back to 2017. I’ve circled several pivot points on the chart where the IBB has reversed higher, which together have formed a solid support level.
Most recently, the stock tapped the $101 level in October 2018 and tested and held that low again in late November.
If the stock continues channeling sideways between support and resistance through January, we can walk away with a good profit from today’s bullish credit spread.
Using a spread order, sell to open the IBB Jan. 18th (2019) $98.33 put and buy to open the IBB Jan. 18th (2019) $88 put for a net credit of about $0.45.
A put credit spread is a bullish position that involves writing (selling to open) an option and simultaneously purchasing (buying to open) an option at a different strike price in the same underlying security. The position, or leg, of the spread trade that you sell gives you a cash credit to your trading account. The option you buy limits your risk and lowers your margin requirement for the trade.
This is a bullish trade in which you want the underlying share price to stay above the upper strike price of the spread. In this case, we want IBB to stay above $98.33 through the Jan. 18 expiration.
This is a high risk trade, so take a small position.
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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.