iShares NASDAQ Biotechnology Index ETF (IBB) Puts Fly Amid Sector Swoon

Drugmaker stocks are taking it on the chin today, as evidenced by the sinking iShares NASDAQ Biotechnology Index ETF (NASDAQ:IBB)

by Alex Eppstein

Published on Jan 11, 2016 at 2:54 PM
Updated on Jun 24, 2020 at 10:16 AM

Biotech stocks are getting hammered today (which happens to coincide with the kickoff of the J.P. Morgan Healthcare Conference). Case in point, the iShares NASDAQ Biotechnology Index ETF (NASDAQ:IBB) has slid 4.2% to trade at $289.50, on pace for its eighth straight drop. Not surprisingly, put traders have set their sights on the exchange-traded fund (ETF), in hopes of more drugmaker downside.

By the numbers, 11,000 IBB puts are on the tape versus 6,500 calls. For some more perspective, consider that at this point in a typical session, fewer than 5,000 puts would have been traded. Digging deeper, the most active option is the January 2016 280-strike put, and traders buying to open positions foresee a move south of $280 -- and into annual-low territory -- by this Friday's close, when the options expire.

Put buying is nothing new for IBB speculators. During the past two weeks across the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), 2.55 puts have been bought to open for each call. Relative to all comparable readings taken in the prior year, the current put/call volume ratio registers in the high 84th percentile. Stated simply, traders have rarely initiated long puts over calls at a more rapid rate, looking back 12 months.

It isn't a bad time to buy premium on short-term IBB strikes, either. The ETF's Schaeffer's Volatility Index (SVI) of 32% ranks below 69% of all other readings taken in the past year, suggesting options in the front three-months' series are relatively inexpensive, from a volatility perspective.

Meanwhile, from a technical standpoint, it's no wonder traders are placing downside bets on the iShares NASDAQ Biotechnology Index ETF (NASDAQ:IBB). Since hitting a record high of $400.79 last July, the shares have surrendered over one-quarter of their value, though the $285 region has contained the ETF's pullbacks.

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