Option Trader Bets $4.6M on Biotech Rally

Breaking down a massive call purchase on uptrending biotech ETF XBI

Oct 4, 2017 at 2:43 PM
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Pharmaceutical stocks have dominated headlines today, including a major FDA win for Mylan (MYL) and a potentially lucrative partnership for CytomX Therapeutics (CTMX). Against this backdrop, the SPDR S&P Biotech ETF (XBI) is fresh off a two-year high, and one options trader is paying big bucks to bet on even more upside for the exchange-traded fund (ETF).

So far today, XBI has seen roughly 38,000 calls change hands -- more than four times the number of puts traded, and seven times the fund's average intraday call volume. XBI call volume is now pacing for the 99th percentile of its annual range. Most of the action centers on the overhead November 90 call, where a trader seemingly bought to open 22,218 contracts this morning, at $2.06 apiece, or about $4.6 million total (number of contracts * 100 shares per contract * premium paid).

In order to profit on the seven-figure bullish bet, the speculator needs XBI shares to topple $92.06 (strike plus premium paid) before the options expire on Friday, Nov. 17. At last check, the ETF was up 0.3% at $88.05, and just off a two-year best of $88.48. To hit breakeven, XBI would need to rally about 4.6% from current levels in the course of roughly six weeks. What's more, $92.06 would mark an all-time high for the fund, taking the shares beyond their July 2015 peak of $91.10.

XBI biotech ETF chart

Today's appetite for XBI calls is relatively rare. The fund's 10-day put/call volume ratio on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) indicates that buyers have picked up 4.52 XBI puts for every call during the past two weeks. This ratio is higher than 95% of all other readings from the past 12 months, indicating a bigger-than-usual affinity for XBI puts over calls in the past two weeks.

Of course, some of the recent XBI put buying could be attributable to biotech bulls seeking an options hedge, considering the ETF has nearly doubled since its February 2016 lows. In any case, history is on the bulls' side: the SPDR S&P Biotech ETF has been one of the best-performing funds in the fourth quarter. Specifically, XBI has ended the quarter higher 70% of the time over the past 10 years, averaging a gain of 3.93% -- not quite the aforementioned 4.6% rally needed by today's option bull, but still healthy.

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