Yesterday (here) we took another look at the Biotech sector. We first posted feelings on Aug 6th, where we made the following observation from a technical and sentiment standpoint:
The M&A frenzy in Biotech is unnatural and frankly demonstrates toppy behavior. The XBI, the S&P Biotech etf up 37% on the year, up 75% from its 52 week lows, and only down 9% from the 52 week and all time highs made last month. It looks and feels like an epic short opportunity:
The sector obviously broke the uptrend, and is now down about 20% from the all time highs made in mid July. $200 is a massive technical level, and whether it holds the 200 day moving average or not (purple line below) will determine the next 10% in the biotech etf. If broader market volatility continues it won;t hold:
As we highlighted yesterday, options prices are very high making long premium directional trades challenging in the event that the underlying etf settles into a range or worse drifts in the opposite of one’s desired direction:
So here is the trade:
XBI ($219) Bought Sept 215/190 put spread for 5.50
-Buy to open 1 Sept 215 put for $7.30
-Sell to open 1 Sept 190 put at 1.80
Break-Even on Sept Expiration:
Profit: gains of up to 19.50 below 209.50 with max gain at 190 or below
Loss: of up to 5.50 above 109.50 with max loss at or above 215
Rationale: We sold the downside put to help mitigate potential decay into Labor Day and Chinese markets being closed the next 2 days. If the etf settles or drifts higher we will have to look to cut losses quickly, using a 50% premium stop.