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This morning I am recommending a bearish trade on the iShares Nasdaq Biotechnology ETF (NASDAQ:IBB).
Biotechnology stocks are up, but as I mentioned last Friday, the recent rally is a snap-back. We need to see the market successfully retest the lows set on Dec. 24-26. We have a good opportunity for bearish plays while the market is up, and IBB is at a turning point.
IBB broke important support at $100 in mid-December and fell all the way down to the $89 level at the lows by the end of the year. However, it has bounced sharply since then and is now above that $100 support level. I don’t think it will be able to stay above $100 for long, and I expect it to head lower over the near term.
Daily Chart of iShares NASDAQ Biotechnology Index (IBB) — Chart Source: TradingView
If we look at the chart above, we see that IBB tapped its 50-day moving average on Friday. After a sharp decline at the end of 2018, IBB may encounter new resistance as it tries to cross this level.
Cheap Downside Play
Biotechnology stocks are up at the moment. Both IBB and SPDR S&P Biotech ETF (NYSEARCA:XBI) rose over 5% by the close on Friday. For traders like us, that lowers the price of put options.
If the market does retest its lows in the short term, IBB will likely fall back below old support. With a put debit spread, we stand to make a big profit with relatively little risk.
Using a spread order, buy to open the IBB Jan. 25th $95 put and sell to open the IBB Jan. 25th $92 put for a net debit of about $0.65.
A debit spread is simply a way to lower the cost of buying options, as the option that you sell to open (short) helps offset the cost of the option that you buy to open. Therefore, this put debit spread is a way to lower the cost of buying bearish put options. Many brokers will require the use of margin and/or a set amount of reserved capital to execute a debit spread; contact your broker directly for specific requirements.
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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.