Considering Our Options – $XBI: Bio Math

by CC September 16, 2015 2:20 pm • Commentary

Two weeks ago we looked to fade the bounce in the biotech etf XBI with a slightly out of the money put spread. A few things have happened since then that I want to go over. First, here was the original 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

Since the trade the broader market is higher and the XBI is with it. There’s also the matter of a 3-1 stock split. After the split the original trade looks like this:

XBI ($73) Bought Sept 71.67/63.33 put spread for 1.83

-Buy to open 1 Sept 71.67 put for $2.43

-Sell to open 1 Sept 63.33 put at .60

Now with the stock 76.53 this trade is a lottery ticket expiring in just a few days. In hindsight this entry was too aggressive and the stock now makes more sense as a short entry on a long term chart as a potential head and shoulder foundation dating back to earlier this year:

Screen Shot 2015-09-16 at 12.05.45 PM

Obviously whether it is or isn’t a head and shoulders depends on whether the stock fails at these levels. If the reaction to the FOMC decision is positive the stock can certainly breakout above the 50 day moving average. But that will depend on a big rally in the broader market. We’re out of bullets here and it’s unlikely we’d get bailed out on the FOMC alone as this trade expires Friday. But if the market reaction is negative the 79 level from this morning (or even better 80) may be the entry on the short side.