Big Printin’ XBI – BioWreck

by Dan September 8, 2016 4:01 pm • Big Printin'

Despite the S&P 500 (SPX) very near all time highs, up nearly 7% on the year, Biotech stocks are one of the only S&P sectors down on the year, with the S&P Biotech etf (XBI) down a whopping 10.5% year to date. The sector remains a bit of an enigma with the push and pull of M&A on one side, and drug pricing pressures on the other.  The extreme price action in the XBI since making all time highs in July 2015 shows just how controversial the sector has been, with a peak to trough draw down of 50% to its February 2016 52 week lows, to the 45% bounce, but maybe most importantly the fact that the XBI remains 30% from the all time highs. 

A quick gander at the chart since the start of 2015 shows that $60 was important technical support up until the breakdown in Jan 2016, and also served as formidable technical resistance until its recent break above:

XBI since Jan 2015 from Bloomberg
XBI since Jan 2015 from Bloomberg

The recent consolidation above $60 is feeling a tad precarious, especially when you consider the fact that the rhetoric around drug pricing will only heat up during the homestretch of the presidential election.

Which brings me to a trade in the options market that caught my eye in the XBI today when the etf was  trading $63.50, a trader paid 1.25 for 2,000 of the Sept 30th quarterly 62.50 / 57.50 put spreads to open.  This trade breaks-even at $61.25, down about 3.5% from the trading level, offers gains of up to $3.75 between $61.25 and $57.50 (down 9.5%). The trader is risking $250,000 in premium to possibly make up to $750,000.

Vol is historically cheap:


But the Sept 30th at-the-money straddle is priced at about 3.85. If you bought that, and thus the implied move you would still need the etf to move 6% in either direction to break even.

That’s a lot in the current low vol environment but it’s not much a move at all looking back to how these stocks were moving in in 2015 and early 2016. At least one trader is expecting (or worried) about the end of the volatility nap in the next few weeks.