StemCell Therapy

By Nicolas Chahine, InvestorPlace Contributor|Apr 13, 2017, 12:59 pm EDT

The iShares Nasdaq Biotechnology Index (ETF) (NASDAQ:IBB) has been under technical pressure. For the past few weeks, IBB shares have been building a bearish head-and-shoulders pattern. To catch that breakdown I shared a trade that will do it for free, and its working already.

In the short term, the IBB ETF is tight, suggesting that a sizable move should be coming. But with no major changes in the thesis, the breakout from the current squeeze is more likely up than down. So for that reason, I want to book my small profits in the bearish setup and reset a long IBB trade for the next year.

The Bet: Sell the IBB Jan 2018 $240/$235 credit put spread. This is a bullish trade for which I collect 90 cents per contract to open.

I have a 90% theoretical chance of having it expire for maximum gains. If IBB shares close above $240, this trade would yield 20% on money risked.

By taking this risk, I accept the fact that IBB shares could fall $20 or more in the next few weeks. But with a 20% price buffer and the amount of time until expiration I am confident that I will be able to manage the short term price challenges.

Click to Enlarge The fundamentals of the components of the IBB are, for the most part, solid after all.

I also have to acknowledge the political threat that still looms from President Donald Trump. He has vowed to address the pricing models of biotech and healthcare sectors. If not for these threats I would have sold the bet as naked Jan 2018 $220 puts for $5 per contract instead. But given that we are near all-time highs in addition to the aforementioned threats, I will start the trade as a spread then decide if I want to turn it into a naked put position.

Learn options as easy as 1-2-3 here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernicand stocktwits at@racernic.

Article printed from InvestorPlace Media, http://investorplace.com/2017/04/ishares-nasdaq-biotechnology-index-etf-ibb-etf-confidence/.

2017 InvestorPlace Media, LLC

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Go Long the iShares Nasdaq Biotechnology Index (ETF) (IBB) ETF With Confidence - Investorplace.com

This entry was posted on April 13, 2017 at 9:41 pm and is filed under Biotechnology. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed. |