A Nice Biotech Play

• stevenplace
• June 4th, 2009

With strong moves in particular names in the sector (DNDN anyone?) IBB has been on a pretty nice breakout:

With the etf, the train has left and a prudent entry with a good stop and risk/reward does not exist. But there are individual names that are doing well and primed for a breakout… and I’ve got an option play that will exploit a breakout with a positive theta component. So if you’re a premium subscriber, read on!

So the play is in AMGN. Let’s take a look at the daily chart:

Very nice breakout on the dailies, it pulled back near the breakout point– this could make a nice entry point for a calendar spread.

Here’s the trade: Buy Jul/Jun 52.5 Call Calendar Spread for 1.25

So you’re buying the July Call for 180-190 and selling the front month (Jun) for 65-70. This is a moderately bullish play with the assumption that we won’t pull back much further, but there are areas of overhead resistance that will cause price to stall within the next two weeks.

Now while I’m suggesting you get into the calendar play outright, you can definitely leg into it by buying the Jul near support, waiting for a runup and then selling the front month option for a better fill than the one I suggested.

There isn’t a whole lot of implied volatility in the name, so the options board isn’t expecting a whole lot of news. There is some market risk with employment data coming out so if there’s a gap either way, wait for price to settle.

Also note that since it’s Friday, a lot of extrinsic value will come out of the front month as market makers begin to prepare for the weekend, so I wouldn’t wait until the end of the day to fill this order.

As for risk management, I’d set a worst case stop below 49 to exit the calendar. But that’s assuming you don’t want to play around the position. See, the calendar spread essentially is trying to get you a better basis on your July options. The ideal scenario is that we rally in the name but not that hard, so you can buy back the front month for a profit, thereby reducing your basis. If we get a pullback even further (say 48) you could buy back the front month and increase your overall delta exposure. But that is if you are willing to take a little more risk and reduce your position size. Those are two possible scenarios for you to consider when looking at this play.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

Tickers: amgn, ibb

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