Options Trader Drops 7-Figure Bet on Biotech Stocks

The ETF's 14-day RSI is on the rise again, something that's preceded previous sell-offs

May 18, 2018 at 1:36 PM
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Many of the top losers on the Nasdaq today are biotech stocks, and options data on the SPDR S&P Biotech ETF (XBI) suggests at least one trader is confident more downside is ahead in the coming weeks. Specifically, someone seemingly initiated a long put spread by buying to open 9,700 June 92 puts and selling a same-sized block of the June 82 puts. Subtracting the premium collected on the 82-strike puts (23 cents) from the price of the 92-strike puts ($1.93) means the trader paid $1.70 for each spread, putting their initial cash outlay at $1.65 million ($1.70 * spreads initiated * 100 shares per contract).

XBI options were extremely popular last week, too, after President Donald Trump announced his plan to reduce drug prices. For the most part, premium buyers have preferred puts over calls, based on data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). The exchange-traded fund (ETF) has a 10-day put/call volume ratio of 2.22 across those exchanges, showing put buying has more than doubled call buying.

Skeptics have moved in on other fronts, as well. Short interest on XBI has been trending higher since mid-October, up almost 40% in that time. This has lifted the short interest ratio to 7.00, meaning it'd take short sellers seven sessions to buy back their positions, based on average daily volumes. In fact, the biotech-stock trader landed on the list of most shorted ETFs over at ETFChannel.com.

Looking at the charts, XBI is up 33.6% year-over-year, last seen trading at $93.53. But price action has bee choppy in 2018, and the 14-day Relative Strength Index (RSI) is again nearing the overbought level of 70, last seen at 62.18 after a multi-week rise. As you can see on the chart below, similar rises in this metric have preceded sharp pullbacks in 2018.

biotech etf chart


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