Schaeffer: Biotechs and Semis

03/19/2004 12:00 am EST


Bernie Schaeffer

Chairman and CEO, Schaeffer's Investment Research

Although Schaeffer's Investment Research is best known for its expertise in options, the advisory firm also covers sector trusts, and in some cases even recommends options on exchange traded funds. Here are recent buys for HLDRs on the semiconductor and biotech industries.

"The Semiconductor HOLDRs Trust (SMH ASE) represents a basket of companies that are involved in the semiconductor industry," notes Bernie Schaeffer in hisThe Options Advisor . "Some of its components include Advanced Micro Devices, Broadcom, Intel, Micron, and Texas Instruments. Pessimism toward the chip sector continues to blossom. The open interest ratio for SMH illustrates that options players are showing a preference for puts over calls. What's more, short interest continues to build, with the number of SMH shares sold short inching higher in February. This accumulation of bearish bets continues to linger near all-time highs. An unwinding of this pessimism could help fuel further gains for the trust. Technically speaking, the semiconductor index is holding at key support and at a level that has been instrumental in containing pullbacks for nearly a year. For options traders, we recommending buying the SMH August 35 call (.SMHHG ASA).

Joe Sunderman, an analyst with Schaeffer's Investment Research, adds, "The Biotech HOLDRs Trust (BBH ASE) rallied recently on the heels of gains in Genentech and Sepracor. This push higher from two major components in the index catapulted the BBH above resistance in the 145 area (before pulling back). Despite this strong price action, options speculators have been aggressively betting against the BBH index. The put/call open interest ratio has risen dramatically over the last several weeks and currently stands at 1.45, which is higher than 91% of all put/call readings measured over the last 52 weeks. The short-interest picture on the Biotech HOLDRs is also notable, as total short interest increased by 7% last month. The current short-interest ratio stands at 5.98, meaning that it will take over five days (based on the stock's average daily volume) for all short positions to be covered. We recommend a long position with a stop on a trade below 140 and a target of 165."

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