2 Options Trading Ideas from the Biotech Sector

Contrarian traders can still find attractive opportunities on biotech stocks EXACT Sciences Corporation (EXAS) and Exelixis, Inc. (EXEL)

Mar 8, 2017 at 2:18 PM
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It's been a rough run for drug stocks lately, especially with this week's tweet on drug pricing from President Donald Trump weighing on the sector. According to our internal Sector Scorecard -- compiled by Schaeffer's Senior Quantitative Analyst Rocky White -- the biotech sector as a whole looks weak in terms of bullish contrarian opportunities. But that doesn't mean the sector lacks any individual names worthy of our attention. Below we'll examine two stocks that appear particularly attractive for options buyers, EXACT Sciences Corporation (NASDAQ:EXAS) and Exelixis, Inc. (NASDAQ:EXEL).

First, though, let's take a look at the biotech sector overall. Of the 50 components we track under the "Biomedics Genetics" umbrella, nearly two-thirds are trading above their 80-day moving averages. Analysts hold slightly fewer "buy" ratings than one year ago, and while short interest levels have dropped, they are still notably elevated. Meanwhile, the average 12-month return across the sector is a market-beating 28.5%. But after choppy price action for the past year, the iShares Nasdaq Biotechnology ETF (IBB) is lagging, up just 9.5% year-over-year. Shares of the exchange-traded fund have been fighting for gains lately, though, and yesterday bounced from a fresh layer of support. IBB could also get a boost from an unwinding of bearish positions in the options pits.

EXACT Sciences Looks Ripe for a Short-Squeeze

EXAS has taken off in recent months, following an early February bounce off its 20-day moving average -- and tapped an annual high of $24.50 just last week. Up 2.9% at $22.19 today, the stock is sitting on an impressive 250% year-over-year advance. Despite these huge gains, though, traders continue to bet against the security. In fact, short interest is lingering near levels not seen in at least 15 years, with 33.3 million shares sold short. Moreover, these bearish positions represent 31.5% of EXAS' total float, or nearly four weeks' worth of buying power, at the stock's average daily volume.

Looking to the options pits, puts have been bought to open relative to calls at a faster-than-usual clip, per the stock's 10-week put/call volume ratio of 0.55 on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX)  -- just 5 percentage points from an annual bearish high. Meanwhile, it's an attractive time to buy short-term options, with the stock's Schaeffer's Volatility Index (SVI) of 42% docked at a 12-month floor, suggesting historically low volatility expectations are being priced in. What's more, EXACT Sciences Corporation boasts a Schaeffer's Volatility Scorecard (SVS) of 94, indicating the options market has underpriced the stock's ability to make big moves over the past year.

Put Buyers Target Soaring Exelixis

Up 478% over the past 12 months at $22.37, EXEL has been no slouch on the charts, either. The shares have been climbing atop the 20-day moving average since early January, and tagged a 16-year high of $23.49 late last month. But while short interest on the stock plummeted through most of last year, these pessimistic positions have begun to pick up again in recent months, climbing by 18% during the two most recent reporting periods without pressuring the shares lower.

Options traders have been quick to initiate long puts relative to calls on EXEL, too. The stock's 50-day put/call volume ratio of 0.81 on the ISE, CBOE, and PHLX ranks higher than 88% of the past year's readings. Of course, given the stock's recent strength, it's possible shareholders have been purchasing puts to protect paper profits against a pullback. Regardless, Exelixis, Inc.'s near-term options are currently well-priced, from a volatility standpoint. The stock's SVI of 60% ranks in the low 3rd percentile of its annual range, while its SVS clocks in at 93.

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