Are You On Drugs? (XBI, GILD)

by CC November 9, 2016 12:15 pm • Trade Ideas

With the election results decided, and the market not down the 5% it was as indicated by the futures last night, you may be forgiven for thinking that we basically have market status quo from yesterday’s close. But peek under the hood and a lot is going on today based on the election results. Some of those moves are affecting trade ideas we’ve discussed on the site. So let’s dive in.

The first to look at is the healthcare/pharma/biotech stocks. Some of these stocks have had an awful year on the assumption that a Clinton White House and the possibility of a Democratic Senate would mean legislation targeting some of the shenanigans going on in drug pricing. With a Trump administration and both houses of congress now Republican, that battle is likely off the table, or least a low priority, compared to things like tax breaks for high income earners. So let’s look at some bullish strategies we had laid out in the space. The first was in XBI, the biotech etf. Here was the trade idea from Oct 21st:

Trade: XBI ($59.85) Buy Jan 60 / 75 call spread for $4
  • Buy 1 Jan17 60 call for $4.40
  • Sell 1 Jan17 75 call at 40 cents

XBI is higher by nearly 9% today at $63. At this price the the Jan 60/75 call spread is worth about 5.15. One way to manage this might be to close the 75 calls and roll them down to the 70’s and reduce premium at risk. That’s a good move for those concerned that this move is too far too fast but still see continued upside. Another option to take some deltas off here is to turn the trade into a call butterfly by selling a 75/90 call spread. That would only garner about 50c extra here so that be a better strategy with the stock higher than here. But keep that move in mind in case the etf follows through in the next few weeks.

The next trade idea to look at was from more recently in Gilead (GILD). Here was the trade idea from November 7th:

GILD (74.15) Buy the Nov/Jan 77.5 call calendar for 1.40
  • Sell 1 Nov 77.5 call at .45
  • Buy 1 Jan 77.5 call for 1.85

GILD is higher by 6% and is actually above the short strike in Nov. With the stock 78.50 this trade is worth about 1.75. As far as management this one is slightly more complicated because above 77.50 it is actually short deltas until November expiration. If the stock pulls back a little here the trade is in great shape to be a nice profit and a possible roll out and up. But obviously if the stock goes higher in the near term it could become a loser. The best trade management here is to try ot be patient for a pullback towards 77.50. And if that doesn’t happen, simply keeping the original premium at risk as a stop on the upside so the worst that can happen is getting out for even.