Trade idea: Nektar Therapeutics could be looking at a choppy, range-bound few weeks of trading to round out April. As such, options traders may want to consider selling credit spreads to capitalize on this technical setup, says Elizabeth Harrow of Schaeffer’s Research.
Biopharmaceutical stock Nektar Therapeutics (NKTR) is one of the worst-performing S&P 500 stocks during the month of April, according to data from Schaeffer's Senior Quantitative Analyst Rocky White.
NKTR's average April return is a loss of 5.19% over the past 10 years, with only three of those 10 returns positive. Based on the equity's March 29 close at $106.26, another average loss this year would place the stock at $100.75 by April’s end.
But with just a few trading days in the books so far for April, NKTR is already trading down more than 7% month-to-date.
The shares on Monday tumbled below the psychologically significant $100 level, and broke below support at their 20-day moving average in the process. Now, the overhead century mark appears to be acting as resistance, with NKTR on track to log its third consecutive close below $100.
Given this week’s technical breakdown, NKTR's Average Directional Index (ADX) has plunged from its first-quarter highs north of 67 to its current perch around 26 -- just above the 25 threshold that serves as the line of demarcation between strong and weak price trends. In other words, the stock's strong bullish price trend is rapidly bleeding momentum.
However, there’s a nearby line of defense at the $95 level, which is home to the equity’s 40-day moving average. This trendline previously helped to contain a mid-February pullback to the round $70 level.
Against this backdrop -- with the stock sandwiched between support and resistance, and having already registered a monthly loss in the range of its typical April performance -- NKTR could actually be looking at a choppy, range-bound few weeks of trading to round out the month. As such, options traders may want to consider selling credit spreads to capitalize on this technical setup.
Trade-Alert data shows NKTR's at-the-money implied volatility (ATM IV) currently stands around a healthy 69%-70% for standard and weekly options expiration series out to May 4. Specifically, 30-day ATM IV is resting in the elevated 89th percentile of its annual range, which means short-term options are pricing in considerably higher-than-usual volatility expectations.
This inflated IV effectively raises the reward for credit spread sellers -- whose maximum profits are established and collected at the time the trade is initiated, and whose best-case scenario involves a deflation in IV over the life span of the spread.
