Big Printin’ – S&P Biotech (XBI)

by Dan September 19, 2016 3:58 pm • Big Printin'

By now we probably sound like a broken record when it comes to unusual options activity. But for the post I am going to write, our usual disclaimer makes a ton of sense: without intimate knowledge of the trade, the individual who initiated the trade’s intent, or what it may be against, it is useless to draw any investment conclusions from a large block of options that look to be bought in a directional manner.

Ok with that out of the way…

, a large block of puts in the XBI, the S&P Biotech caught my eye shortly after the open, when one of its components, Sarepta (SRPT), opened up 80% following an FDA approval for one of their key drugs.  When the XBI was $65 at 9:37am, a buyer paid $1.84 for 5,000 Oct 63 puts to open, or $920,000 in premium. These puts break-even down at $61.16, or about 6% from the trading level.

We like to identify unusual options activity as it can sometimes give us a sense for investor sentiment, and it’s always interesting to see choice of strikes and expirations to see if they line up with technical levels.

As for Oct expiration, maybe this is a hedge for a PM who is long a portfolio of biotech as protection as we head into the presidential debates in the coming weeks, and the bulk of Q3 earnings.

As for technicals, despite the XBI’s poor relative performance year to date, down 7.5%, and atrocious relative performance from its highs in mid 2015, down about 25%, the charts are shaping up a little, now up about 50% from the 52 week lows made in February.  $60 appears to be meaningful support, and today’s breakout above the six week consolidation puts a new 2016 high near $70 in reach:

[caption id="attachment_66427" align="aligncenter" width="600"]XBI 1yr chart from Bloomberg XBI 1yr chart from Bloomberg[/caption]

Given the low level of realized volatility (white line below), caused by the stock’s recent range-bound action, short dated options prices look fairly reasonable, with 30 day at the money implied volatility (blue line below) very near 52 week lows, making protection appear cheap in vol terms:

[caption id="attachment_66428" align="aligncenter" width="600"]From Bloomberg From Bloomberg[/caption]

One reason this makes me think this is protection, is because $60 is such important support (10% away), and the five year chart below shows that a break there could put a re-test of the downtrend from the all time highs back in play near $50:

[caption id="attachment_66429" align="aligncenter" width="600"]XBI 5yr chart from Bloomberg XBI 5yr chart from Bloomberg[/caption]

My take is simple, relaxed perceived regulatory headwinds in a heated political environment coupled with the potential for SRPT’s news today to put M&A back on the table, and this sector could play a little catch up. One tape bomb though, and this etf is back in the low $60s, and $60 should be used as an ultimate stop for anyone wading in on these stocks.