[Options] Betting on a Short Term Bottom in Biotech

Sean McLaughlin
December 8, 2021

What a difference a couple of days makes!

The froth has definitely come off the $VIX spike over the past week. Does this mean we're all clear? Well, no. Not necessarily and not yet.

But it does give us a little bit of confidence that some short-term lows can be leaned against as good risk management levels when taking long directional bets.

There's still some juicy premium to be sold when looking at some sector ETFs and that brings me to the Biotech sector ETF $XBI.

In this chart, you can see the clear short-term bottom put in on Monday:

And here we can see the recent volatility spike in XBI options:

We're making the bet that this week's low will hold for at least a couple of weeks.

Here's the Play:

I like selling short $XBI January 105 Puts for approximately $2.25 per contract. These will be naked short puts and therefore will require margin to hold the position. This also means we'll have theoretically unlimited risk in the trade, so we'll want to keep our risk management on point.

The good thing is, we've got a recent high-volume bottom to lead against.

Monday's intraday low of 106.92 is the level we're watching. If $XBI sees any close below 106.92, that will be our signal to exit the trade (win or lose).

In the meantime, as long as XBI stays above Monday's lows, we'll have plenty of opportunities to exit for a profit. I'm not going to be greedy with this one. I'll look to cover when I can buy-to-close my short puts for half of what I collected at initiation. So I'll be leaving a resting order to close at around $1.10 per contract.

I'm not interested in holding this risk all the way until January expiration. Let somebody else sweat those last remaining nickels and dimes.

If you have any questions on this trade, please send them here.

ASO subscribers can catch our next video Jam Session this Friday at 2pm ET here. This is where we review some open positions and discuss any adjustments or exits over the past week.

And have you seen the new Options Made Easy course we just launched? I'm super proud of this and if you'd like to do a deep dive into how we think about options trading -- the All Star Charts way -- this is well worth your time.

~ @chicagosean

P.S. We do trades like this regularly. If you'd like to leverage Best-in-Class technical analysis into smarter directional options trades, try out All Star Options Risk Free! Or give us a call to learn more: 323-421-7910

 

Filed Under: