IBB, XBI Plunge Could Catch Bulls Off Guard

Biotech ETFs XBI and IBB are in the red, which could catch recent call buyers off guard

Sep 21, 2015 at 2:59 PM
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Did Hillary Clinton just pop the biotech bubble? A tweet from the presidential hopeful has sent pharmaceutical stocks spiraling, as evidenced by the intraday plunges of the SPDR S&P Biotech ETF (NYSEARCA:XBI) and iShares NASDAQ Biotechnology ETF (NASDAQ:IBB). What's more, it looks like some biotech options traders may be caught off guard.

XBI was last seen 4.7% lower at $75.75, paring its month-to-date gain to just 2.3%. Since the broad-market swoon in August, the XBI has been staring up at resistance at its 10-week and 20-week moving averages, converging in the $78-$80 neighborhood.

On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the exchange-traded fund (ETF) sports a 10-day call/put volume ratio of 1.25 -- higher than 94% of all other readings from the past year. In other words, option players have picked up XBI calls over puts at a near annual-high clip during the past two weeks.

Both short- and long-term bulls have been circling XBI, as the now-expired September 83.33 call and the January 2016 100-strike call saw the biggest open interest changes over the past 10 sessions. The latter calls would move into the money if XBI rallied to triple-digit territory before the close on Friday, Jan. 15, when the options expire. From Friday's close at $79.44, it would require a surge of nearly 26% -- and XBI to explore record highs -- in order for the calls to move into the money.

Today, puts have the rare edge, with more than 21,000 contracts exchanged -- three times the norm, and more than twice the number of calls traded. Digging deeper, it looks like skeptics are buying to open the weekly 9/25 75.50-strike put, which will gain value the deeper XBI sinks south of the strike through this Friday's close, when the weekly options expire.

However, it should be noted that XBI's Schaeffer's Volatility Scorecard (SVS) sits at a paltry 11. In simpler terms, the ETF has tended to make underwhelming moves on the charts during the past year, relative to what the options market has priced in.

It's a similar situation with IBB. The ETF has surrendered 3.9% to sit at $342.96, testing a foothold atop its 50-week moving average. IBB has spent the past few weeks range-bound between this trendline and its 10-week cohort, which is stagnating in the $357 region.

IBB is now 0.3% in the red for September, and a steep pullback could have more than a few option bulls running scared. The ETF's 10-day call/put volume ratio on the ISE, CBOE, and PHLX is docked at 1.00 -- 6 percentage points from an annual high. The out-of-the-money October 370 and 375 calls saw the biggest open interest increases over the last two weeks, and the former strike is now home to peak call open interest in the newly front-month series.

Judging by today's options action, though, short-term IBB traders aren't too worried. While IBB puts outnumber calls -- albeit barely --  the weekly 9/25 350-strike call is most popular. Those buying the calls to open are betting on IBB to stage a rebound north of $350 by the end of the week. However, IBB sports an SVS of just 10 -- meaning the ETF has tended to make undersized moves relative to what the options market has priced in.

Among the multiple sectors we track, biotech is among the most beloved by analysts. As of last week, more than two-thirds of analysts offered up "buy" or better ratings. However, that could be because IBB components sported an average 52-week return of 44.2% -- the best of any sector. Against this backdrop, a steep sell-off in the pharmaceutical sector could spark a bigger shift in sentiment across Wall Street -- and leave the equities vulnerable to a mass exodus of bulls.

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