2 Biotech ETFs That Could Stay Red-Hot in July

XBI and IBB tend to rally in the month of July, and could extend today's quest for new highs

Jun 20, 2017 at 1:31 PM
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Drug stocks are on fire today, led by healthy gains from Regeneron stock. Meanwhile, the iShares Nasdaq Biotechnology ETF (IBB) and SPDR S&P Biotech ETF (XBI) just touched their highest points in more than a year, sparking a flurry of biotech options trading. What's more, if recent history is any indicator, the IBB and XBI exchange-traded funds (ETFs) could be headed even higher in July, and now is an opportune time for short-term options buyers to strike.

IBB ETF Looks to Take Out $300 

The iShares Nasdaq Biotechnology ETF was last seen 2.2% higher at $306.38, and earlier peaked at $308.12 -- its highest point since January 2016. IBB has spent the past 18 months in a channel of higher highs, and has closed the week north of the round-number $300 mark just twice in that time frame. Further, IBB shares are set to end atop the $302 area, which represents a 38.2% Fibonacci retracement of the ETF's decline from all-time highs in 2015 to its February 2016 lows.

IBB biotech etf chart

IBB call options are flying off the shelves at nine times the average intraday pace, and with 24,000 contracts traded, volume has already surpassed the Aug. 1 annual high. Plus, the intraday put/call volume ratio of 0.32 is near an annual low, as fewer than 8,000 IBB put options have traded thus far. Nine of the top 10 most active options are near-term calls, with possible buy-to-open action detected at most. The most popular option is the weekly 6/23 305-strike call, with buyers expecting the iShares Nasdaq Biotechnology ETF to extend its climb through the end of the week, when the options expire.

Total IBB open interest is currently at an annual low, with fewer than 95,000 contracts outstanding. Still, the July 300 call is the most heavily populated option, with close to 4,900 contracts in residence. A takeout of the aforementioned round-number $300 level would place IBB shares above potential options-related resistance at this strike.

Now is an opportune time to buy short-term calls on IBB, if past is prologue. To start, the ETF has averaged a gain of 3.3% in July, since inception, according to data from Schaeffer's Quantitative Analyst Chris Prybal. That's the fund's best month of the year, in fact. Meanwhile, IBB's Schaeffer's Volatility Index (SVI) of 16% is higher than just 6% of all other readings from the past year, indicating the exchange-traded fund's short-term options are attractively priced right now, from a historical volatility standpoint. What's more, short interest represents nearly seven days of pent-up buying demand, at IBB's average daily trading volume -- plenty of fuel for a short squeeze.

XBI ETF Soars to Highest Point Since 2015

The SPDR S&P Biotech ETF (XBI) was last seen 2.9% higher at $76.33, and earlier rallied as high as $76.60 -- territory not charted since September 2015. As with IBB, the shares of XBI have been in a channel of higher lows and highs since bottoming around $44 in February 2016, and the ETF is set to end atop the $73 neighborhood -- a 61.8% Fibonacci retracement of its decline from its mid-2015 all-time high to last year's lows.

xbi biotech etf chart

XBI options are trading at twice the normal afternoon clip, though puts are the options of choice, with 21,000 exchanged, compared to 14,000 calls. Nearly half of the XBI put volume is attributable to a block of 10,000 July 75 puts that crossed the tape earlier, though it's unclear whether they were bought or sold to open. If the speculator bought the puts, they could be locking in profits with an options hedge. If the trader sold the puts, they're expecting XBI to remain north of $75 in the near term.

Similar to IBB, open interest on SPDR S&P Biotech ETF currently sits at an annual low, with roughly 273,000 contracts outstanding. XBI is currently trading above both peak put and call open interest in the front-month series, at the July 70 put and July 73 call, respectively. 

XBI could continue to put those strikes in the rearview, too, if history repeats itself. In fact, the fund is one of the best to own in the month of July, historically, averaging a gain of 5.4% since inception -- its best month of the year. A short squeeze could add fuel to the ETF's fire, as it would take more than seven sessions to buy back all of these bearish bets, at XBI's average pace of trading. Options traders expecting more short-term upside for XBI can scoop up calls at a relative discount, as the fund's SVI of 23% is higher than just 7% of all others from the past 12 months. 

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