Option Bulls Bombard SPDR S&P Biotech (ETF) (XBI)

The SPDR S&P Biotech (ETF) (XBI) is rising on today's biotech upswing, and one options trader is betting on more upside

Jan 9, 2017 at 12:51 PM
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The SPDR S&P Biotech (ETF) (NYSE:XBI) is on pace to end in the black for the fifth day straight, currently trading 2.4% higher at $64.86. Several notable biotech movers-- including Ariad Pharmaceuticals, Inc. (NASDAQ:ARIA) and Merrimack Pharmaceuticals Inc (NASDAQ:MACK) -- are helping to boost the exchange-traded fund (ETF), which has added more than 9.5% in the past week. What's more, it looks like one options trader may be rolling a bullish position even higher.

XBI recently bounced off its 200-day moving average, and is now sitting above its 80-day moving average, which blocked several rally attempts in recent weeks. Widening the scope, XBI has been in a channel of higher lows since February, adding roughly 44% in that time frame.


In XBI's option pits, call buying has accelerated of late. Specifically, XBI calls today are trading at three times their average intraday clip, including one trader potentially rolling up her 5,000-contract bull call spread from the January 2017 62- and 65-strike calls to the January 2017 66- and 69-strike calls. If this is the case, the trader expects XBI to muscle atop $66.78 (purchased strike price plus the net debit of 78 cents) by expiration on Jan. 20. However, this trader's profits are capped after gains beyond $69.

Today's appetite for calls merely echoes the growing trend. XBI's 10-day call/put volume ratio at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) shows 2.15 calls bought to open for every put over the last two weeks. This reading sits just 4 percentage points from an annual peak, indicating traders have rarely been more bullish during the past 12 months.

XBI's options are attractively priced at the moment. The ETF's Schaeffer's Volatility Index (SVI) of 35% sits in the bottom 18% of its annual range, indicating near-term option traders are pricing in relatively low volatility expectations. Meanwhile, SPDR S&P Biotech's (ETF) (NYSE:XBI) Schaeffer's Volatility Scorecard (SVS) of 73 suggests XBI has tended to exceed volatility expectations over the last year. 

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