NEW DIRECTIONAL CALL PLAYS
Biotech ETF - BBH - close: 88.91 change: +1.47
Stop Loss: 85.75
Target(s): to be determined
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below
Why We Like It:
Last year the biotech industry doubled the market's growth with +60% gains in the BBH. The rally continued into January and February with almost another +20%. Then sentiment reversed. Suddenly traders did not want to own the momentum names or the high-growth names. News articles and debates about the extremely high costs of some biotech treatments like Sovaldi helped feed the sell-off. Biotech experienced 20 percent correction (actually -22.6%) in less than two months.
Now it appears that investors are losing their fear over the growth names again. The BBH has been consolidating sideways the last several weeks. Many believe the correction in biotech is providing a great entry point. There are plenty of high-profile biotech firms with low multiples. A lot of the big names have high-quality pipelines. The group could see more M&A activity as older firms seek to buy up younger rivals.
We want to be ready to buy calls if the BBH can breakout from this consolidation phase. Currently shares of this ETF are testing resistance near $90.00 and its 50-dma and 150-dma.
I am suggesting a trigger to buy calls at $90.25.
Bear in mind that biotech stocks can be volatile. The BBH does not see a lot of volume and the option spreads are wide. Add it all up and I would label this a more aggressive, high-risk/high-reward trade. Investors may want to start with small positions.
Trigger @ $90.25
- Suggested Positions -
Buy the Sep $95 call (BBH140920C90) current ask $3.10
Option Format: symbol-year-month-day-call-strike
Entry on May -- at $---.--
Average Daily Volume = 119 thousand
Listed on May 22, 2014