Has Biotech Finally Bottomed?

05/20/2014 8:00 am EST

Focus: OPTIONS

It has been a rough couple of months for the stock market as a whole, and for this erstwhile high-flyer in particular, so Andrew Giovinazzi of OptionPit.com offers a trade idea for this beaten-down sector.

Stocks posted a slight gain Friday as the Russell 2000 stopped its slide somewhere midday. The short jump we had in volatility ended with the VIX closing 12.44 down .73. Without a reason to rally like early in the week, if there was one, stocks are on a meandering path for the short term. The talk of European stimulus is not giving the market the same gas it did last year or the year before. At this point, with earnings at the high end, companies need to make more money and for now that is a high hurdle.

This is a better time to look at groups still off their highs, but really not gaining any new traction. The iShares Nasdaq Biotechnology Index (IBB) comes to mind. Most of the stocks in the index are the more blue-chip biotechs and are just a shade less than 50 points off of the highs. Essentially this is a group that got sold hard and is only making its way back in fits and starts. Realized volatility for the IBB is in the 25 handle.

chart
charts by www.Livevolpro.com
Click to Enlarge

This is a good recipe for an iron condor or iron butterfly.

The Trade
I would position a 30-day iron condor to a flat delta in case the IBB bounces a bit. If the IV gets to the 24 handle, look to close.

Disclosure: positions is several large-cap biotechs

By Andrew Giovinazzi, Chief Options Strategist, OptionPit.com

Related Articles on OPTIONS