[Options Premium] Getting Long the Whole Space

Sean McLaughlin
June 22, 2020

Steve Strazza posted a great piece on a bunch of stocks in the Biotech space that are setting up for some nice runs. And he outlined 6-12 month price targets for all of them, should the move materialize. There are some robust gains to be had here:

As long as price is above its 2015 highs near 134, we don’t want to bet against this breakout. Sure, we’d like to see momentum register an overbought reading and finally confirm these new highs, but price is always the final arbiter of truth… and right now, it’s pointing higher.

From an options trader's perspective, unfortunately there isn't a ton of options volume and open interest in many of these names. This is a bummer.

But have no fear, there's still a smart, risk-defined way to play the space.

Here's a chart of the Biotech sector ETF $IBB:

And nicely, volatility in the options is near its lowest levels of the year:

Therefore, the cleanest way to play this opportunity is a straight up purchase of long call options. This will define our risk in a notoriously tricky sector, and give us the potential for theoretically unlimited upside.

Here's the Play:

We like buying $IBB Dec 150-strike calls for $6.00 or cheaper. Normally I prefer to by 25-delta calls, but in this case there is significantly more open interest at the 150 strike (traders LOVE big round numbers).

The most we can lose in this trade is the debit we pay to enter. That said, any $IBB close below $130 per share will tell me that I'm too early in this trade and it will invalidate my thesis for being long. I'll close my calls out to limit any further losses.

I'd look to close half of this position if/when we see a double in the value of the calls (around $12.00 per contract). This will remove all of the original risk capital from the trade and essentially give us free exposure on the rest for theoretically unlimited gains, and make it easy (-er) to hold this position all the way into December to really catch a run.

All Star Options subscribers: If you have any questions on this trade, please send them here.

If you'd like to try out All Star Options Risk Free, check us out!

~ @chicagosean

 

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