Updates – XBI & GILD

by riskreversal November 22, 2016 1:41 pm • Trade Updates

Biotech and Healthcare stocks are down a couple percent today after an epic bounce following the surprise outcome of the presidential election. A few weeks ago we detailed defined risk trade ideas in the S&P Biotech etf (XBI), as well as in one of its largest components, Gilead (GILD). Here were those trades ideas, from from Oct 21st:

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

and from Nov 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

Let’s look at XBI first. The etf is down over 2% today and risks rolling over on its recent rapid move higher:


The next level of support is the 50 day moving average, about 2 dollars lower than here. Back in early Sept the 50 day moving average held and the etf made a new high. But in October the etf sliced lower through both its 50 day and 200 day moving averages before a bounce into and out of the election. With the etf now 65 the original trade idea is worth $6 versus the $4 originally at risk. One way to slightly reduce risk is to roll down the short call:


  • Buy to close the XBI ($65) Jan 75 call for .67
  • Sell to open the XBI Jan 70 calls at 1.67
New Position – Long the XBI ($65) Jan 60/70 call spread for $3 (currently worth $5)

Rationale – This reduces risk from $4 to $3 after the move higher. It sacrifices some potential upside above 70 but it can still make up to $7 in profits ($5 more than the current profits). At or above 70 on Jan expiration it would be worth $10. The etf is at risk of rolling over here and a stop at the 50 day moving average makes sense on the downside for risk management purposes.


Now to Gilead.

GILD is looking more and more like it was a dead cat bounce as the stock moved quickly from 72 to 80 but is now back below 75, retracing more than 50% of its move higher.


The call calendar that originally cost 1.40 is worth about 1.45 here (now just the Jan calls after November calls expired worthless).

The best trade management at this point is to re-establish the call calendar by selling the Dec same strike:

  • Sell to open the GILD (74.50) Dec30th 77.5 calls at .80
New Position – Long the GILD (74.50) Dec30th/Jan 77.5 call calendar for .60

Rationale – This reduces risk to just .60 and is basically playing for GILD to close the year below 77.5 with the chance for a move higher to start 2017. GILD reports earnings after Jan expiration, so as we get closer to year end it may make sense to roll the Jan calls out to February if the trade is setting up well (close to 77.50). Even if GILD’s bounce was a dead cat, that could work to the trade’s advantage as the stock is now back below strike, and selling the Dec30th call could set up well for a real move higher in 2017.