Posted March 30, 2014 20:16
Over the last few weeks, many of the high-flyers have fallen over 20%. All of these names are in the tech/biotech sector. More specifically, I am looking at buying some calls in IBB (the Biotech ETF) and NFLX.
First the Biotechs: right now the Biotech index has sold off more than 17% from the high. Almost all metrics show that IBB is extremely oversold and I think the bottom is near. The 200 DMA is at $216 and right now IBB is at $229. I think that if IBB were to get down to $220-$225, it would present a very good opportunity to buy some ATM calls expiring in June. Right now the ATM June calls cost around $13. I believe that IBB will regain at least half of its losses by June expiration. If that were to occur, then the option would be around a 100-150% gain. The reason that I think IBB gains back half its gains is because usually after a big correction there is a 50% retracement.
This chart shows the last big Biotech correction, and it came back to the 50% retracement:
I think that the market still has another leg higher before suffering a 10% correction. However, there are many cracks in the technicals of the market and I would only be looking to put on short to medium term trades. The only reason why I am buying June calls is because I want to give myself time for the Biotechs to bounce and I do not want time decay and IV decay to hurt me that badly. The IV is pretty high now on the Biotechs because of the recent volatility and, therefore, any bounce would cause nearer dated options to take a hit due to the IV decline.
Next is Netflix: for Netflix, I would only be looking at buying weekly calls because I think any Netflix bounce is going to be short-lived. It is quite possible you see a $20-$30 move higher on Netflix in a matter of days. The weekly $20 OTM calls on Monday should cost around $1.25-$1.50. Therefore, a $20-$30 move would yield gains upward of 500%.
April tends to be a pretty bullish month for stocks, and with the Nasdaq and the Russell each off around 5% from their highs, it may be smart to buy some May calls in these sectors. I do not think that the market will suffer many more moves to the downside because the VIX (volatility index/fear indicator) is still close to the lows. This tells me that the sell off in these sectors was due to a rotation out of the high flyers and traders do not fear the sell-off. The first quarter will basically end up flat. It is quite possible that the market consolidated during the 1st quarter and will make a sharp move higher over the 2nd quarter. If that is the case, then I think that April could make for an explosive move, and with options relatively cheap in the indexes, I think it is smart to be exposed to the long side for April.
