Some Traders Bet on Q2 Rebounds for Biotech ETFs

The first quarter was not kind to biotechnology stocks and exchange traded funds. The SPDR S&P Biotech ETF (NYSEArca: XBI), the third-largest biotechnology ETF, and the iShares Nasdaq Biotechnology ETF (NasdaqGS: IBB), the largest biotech exchange traded fund by assets, had an average first-quarter decline of 26%.

Multiple factors, including politics, have hampered IBB and its peers. Election year posturing over drug prices represents a significant headwind for the healthcare sector and that is something biotech ETFs like IBB have already proven vulnerable to. Just go back to September 2015 and refer to Hilary Clinton’s Twitter feed.

Investors who are closely watching the presidential race will want to keep an eye on Clinton in the coming months. If Clinton makes her way to the Oval Office and implements more regulation on pharmaceutical drug pricing, biotech companies may underperform the broader market.

XBI which tracks an equal-weight index of biotechnology companies and focuses on smaller biotech names, has been among the more beaten up biotech exchange traded funds, but some technicians believe the charts on XBI indicate upside for the ETF could be ahead. Although XBI is an equal-weight ETF, there have been occasions when FDA and mergers and acquisitions news from just one of the ETF’s holdings has led to significant intraday pops for XBI. [Intercept Lifts ETF]

Some options traders are betting enough is enough when it comes to biotech downside and are forecasting upside for the sector in the second quarter.

IBB “traded 2X daily call volume with notable trades including a buyer of 4,500 May $280 calls at $4.70 to $4.72 (a $2M+ trade) and a late afternoon buyer of 2,000 April 8th (W) $265 calls at $3.60. The IV Skew in the IBB is steeply sloped, so OTM calls are cheap as IV has also pulled back around 30% since peaking in early February,” according to See It Market.