I guess people think it’s safe to go back in the pool. The S&P 500 (SPX) is now up 2% on the year, and just 1% from the previous all time highs. Regular readers know that I am somewhat dumbfounded by the 12% rally in the SPX since Sept 29th, bringing the index back above the key August breakdown level of 2100.
Recently we highlighted the relative under-performance of small cap stocks, specifically looking at the IWM, the etf that tracks the Russell 2000 (read here), which is still 8.5% from its all time highs (made in late June).
One reason for this under-performance in small cap stocks has been the rotation out of Biotech stocks. The IBB, the iShares Nasdaq Biotech etf is still down 15% from its all time highs made in July (it’s up 18% from its Sept lows). The one year chart shows IBB at important technical resistance as it approaches $340. That’s the breakdown level from August and then again in September, and a level that corresponds with the downtrend that has been in place since mid July:
If I were inclined to short something (which I am not, as this rally has taken the shorting life out of me) I would consider $340 as a very attractive short entry.
While short dated options prices remain elevated in the IBB, with 30 day at the money implied volatility at 33.5%, well above the one year realized vol of about 27%, not far from the average for IV for same period:
Buy the IBB (337.50) November 340/320/300 put fly for 4.40
- Buy 1 November 340 put for 10.50
- sell 2 November 320 puts at 3.70 (7.40 total)
- buy 1 November 300 put for 1.30
Rationale – This trade has a breakeven (335.60) on the downside very close to where the stock is trading (337.50) and defines risk if the index continues higher to just 4.40. Its max profit potential is 15.60 at $320 but it isolates a wide band of where it can be profitable between 335.60 and 304.40. This is essentially a consolidation trade after the index’s bounce off the lows.