The Irony of the Biotech Volatility Rush

A look at the 'VIX' of the iShares NASDAQ Biotechnology ETF (IBB)

Sep 25, 2015 at 9:34 AM
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By now you've probably heard the biotech story: Hedge fund guy jacks up the price of some relatively obscure drug 5 billion percent; Hillary Clinton proposes price caps; entire group gets pounded.

Oh, and implied volatility (IV) in the whole group is souring on a relative basis. This, from Bloomberg:  

"Implied volatility on an exchange-traded fund tracking biotechnology companies is at its highest in 16 months versus an ETF that mirrors a broader universe of health companies including insurers and hospitals.

… Clinton's tweet sent traders scrambling to protect against price swings in biotech just as the industry was starting to regain its footing following the late August correction in U.S. stocks. The iShares Nasdaq Biotech ETF has dropped 7.5 percent this week. It lost 0.9 percent at 9:40 a.m. in New York and is on pace for its fifth straight decline. Meanwhile, the broader S&P 500 Health Care Index is down only 3.1 percent since Monday." 

OK, if there was ever a sign of a jittery market, this is it. Hillary has more or less a 50% chance to be our next president. Whomever we elect, they're not starting for 16 months, so already we're talking about something reasonably far in the future and well beyond where the market tends to focus.  And if it's Hillary, there's about 0% chance this cap ever happens. 

Yes, it's now going to briefly turn into an issue, and the jawboning has already had modest impact. But again, there's no chance anything ever passes on this front. And in the interest of equality, I'll add that nothing Trump proposes is going to happen either.  

And yet, the iShares NASDAQ Biotechnology ETF (NASDAQ:IBB) gets slammed and they come running for IBB puts. It's yet another reason to get scared out of stocks. Remember Greece? That was like 27 crises ago now.

The irony of this biotech volatility rush is that it's not particularly justified in the backdrop of actual IBB vol. Even after this week's ugliness, 10-day realized vol (RV) in IBB is about 30, down from a peak of 54 on Sept. 2. What's more, it's actually drifting lower. It was as high as 40 on Monday. Meanwhile, the IBB "VIX" is 37. That's down from a peak of 43.5 on Aug. 25, but up from a recent low of 30 last week. 

Yes, RV lags while IV anticipates. But the news is out already (sort of). The big reaction drop is now in the rearview. Obviously anything can happen going forward, but at this juncture, IBB looks no uglier than the rather ugly market as a whole. So I'm not sure there's any reason to bid vol up here on a relative basis. 

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.


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