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

Apr 6, 2016 at 3:30 PM
facebook X logo linkedin

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. 

Sign up now for Schaeffer's Market Recap to get all the day's big stock movers, must-know technical levels, and top economic stories straight to your inbox.


Unlock Weekend Profits with Chris Prybal's Favorite Strategy Up +487.5% in 2024

With the markets going left, right, and sideways, you need to have a plan now more than ever. 

Expert Trader Chris Prybal is no stranger to volatility, and has mastered finding big stock rallies while other traders aren't looking over the weekend. Rallies that produced gains like +207% on RTX calls, +236% on MARA calls, and +238% on NET calls.

A few simple moves on Sunday at 7pm could be the “Secret Sauce” your portfolio needs to not just stay afloat, but make unprecedented gains in this turbulent market.

Don’t sit on the sidelines, beat the market with Chris Prybal's strategy. Join him now!




Rainmaker Ads CGI