Options Traders Swarm Biotech ETFs Amid Sector-Wide Rally

Options traders are targeting the iShares NASDAQ Biotechnology Index ETF (NASDAQ:IBB) and SPDR S&P Biotech ETF (XBI) today as biotech stocks rally

by Josh Selway

Published on Apr 6, 2016 at 3:30 PM

The iShares NASDAQ Biotechnology Index ETF (NASDAQ:IBB) and SPDR S&P Biotech ETF (XBI) are both surging today, and each are seeing heavy trading volume, as biotech stocks rally. Activity has picked up in the exchange-traded funds' (ETF) options pits, too, where traders are placing bets on both sides of the aisle. 

IBB, for instance, is up 5.2% at $283.69, putting it on track for its highest close since Jan. 22. Speculators are banking on an extended rally for the ETF, with call volume nearing annual-high levels, and more than doubling put volume. The largest trade of the day involved a 2,000-contract block of April 280 calls, and it looks like a trader sold these, possibly closing out the now in-the-money position. 

Other traders are taking aim at the weekly 4/8 series, which accounts for half of the 10 most popular IBB options today. The 282.50-strike call is leading the way, with data suggesting buy-to-open activity. Those purchasing the calls expect IBB to extend its gains above $282.50 before the series expires this Friday. 

There's no question that call buying has been the more popular strategy on IBB lately. Case in point, IBB's 10-day call/put volume ratio at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) comes in at 4.16 -- an annual high. In other words, traders have been buying to open calls over puts at the highest rate in 12 months. 

Elsewhere, XBI has jumped 5.4% at $56.75, and call trading is running at 1.5 times the intraday average as a result. The most popular strike today is the April 55 call, which may be seeing a mix of buy-to-open and sell-to-close activity.

Digging deeper, one trader appears to have initiated a long put spread by buying to open 2,000 weekly 4/29 55-strike puts, while selling to open an identical block of weekly 4/29 48-strike puts. As such, this trader is expecting XBI to descend to $48 before the options expire at the close on Friday, April 29.

Like IBB, call buying has been hotter than usual on XBI. The ETF's 50-day call/put volume ratio at the ISE, CBOE, and PHLX of 0.61 sits just 3 percentage points from an annual high. 

On the charts, though, both of these funds have struggled in 2016, with IBB down over 16% and XBI off more than 19%. This underperformance could be just the tip of the iceberg, according to Schaeffer's Expectational Analysis® data. To clarify, Schaeffer's Senior Quantitative Analyst Rocky White ranks sectors based on how they've performed compared to the sentiment seen on Wall Street. The stocks with the most bullish set-up are at the top, and the most bearish at the bottom. The most recent list had the biotech sector as the second-worst of all those we cover. 

To put this differently, biotech stocks in general have underperformed, yet bullish expectations remain high -- as you may have noticed from the options data on the iShares NASDAQ Biotechnology Index ETF (NASDAQ:IBB) and SPDR S&P Biotech ETF (XBI). So, as contrarians, we'd be wary of this sector, as there's potential for an unwinding of optimism to drive biotech stocks even lower. 

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