The Biotech HOLDRS Trust (AMEX:BBH) is a unique instrument that represents an investor's ownership in the stock of specified companies in the biotechnology sector. HOLDRS (Holding Company Depositary Receipts) allow investors to own a diversified group of stocks in a single investment that is highly transparent, liquid and efficient. Each HOLDRS is a fixed basket of 20 stocks (except the Telebras HOLDR, which holds 12 companies). They work operate much like ADRs; American Depositary Receipts, which allow investors to purchase foreign-owned companies on the U.S. exchanges in dollar denominated amounts. In just the same way, the investor actually owns the shares of each underlying company, receives dividends, proxies, and annual reports from each. The HOLDRS are not managed, and once the companies and amounts have been determined they are fixed, no companies will be substituted. In this way, the HOLDRS differ somewhat from Spiders (SPDRS), or Standard & Poor Depositary Receipts and other exchange traded funds, which will add and delete stocks on a regular basis, usually in conjunction with an index that they are tracking.
A complete explanation of this issue, including the companies that make up each HOLDRS' particular industry, sector or group can be found here:
Shares of the Biotech HOLDRS Trust plunged last week, weighed down by losses in Biogen Idec (NASDAQ:BIIB), which dropped a third of its market value after the company was forced to suspend sales of its new multiple sclerosis drug Tysabri. The catalyst for the decision was the death of a patient from a rare and often fatal infection of the central nervous system and the news cast yet another shadow across much of the biotech sector.
Now the BBH is in a near-term downtrend and considering that March is traditionally among the weakest months of the year for these stocks, it seems reasonable to bet on a neutral-to-bearish outlook for the group as a whole. The technical indications suggest the BBH has a high probability of remaining below the sold (call) strike at $145 and traders who prefer the stability of a broad-based instrument should consider this position.
PLAY (conservative - bearish/credit spread):
BUY CALL APR-150.00 GBZ-DJ OI=1225 ASK=$0.40
SELL CALL APR-145.00 BBH-DI OI=1981 BID=$0.85
INITIAL "NET-CREDIT" TARGET = $0.50-$0.55
POTENTIAL PROFIT (X 5 contracts) = $250
RETURN ON INVESTMENT (max) = 11%
COST BASIS = $145.50
LOSS-LIMIT/EXIT POINT = $143.00 (cons) - $145.25 (aggr)