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Trades position for biotech pullback

David Russell (david.russell@optionmonster.com)

Biotech has been on fire, but traders are bracing for a pullback.

optionMONSTER's Depth Charge monitoring system detected the purchase of 2,500 September 190 puts in the iShares Nasdaq Biotechnology Fund for $4.20. An equal number of September 180 puts were sold at the same time for $1.80. Volume was more than 20 times the previous open interest at each strike, indicating that new positions were initiated.

Owning puts locks in the price where the IBB can be sold, while selling them programs a potential buy order. Combining the two controls a move between the two levels, in this case $190 and $180. It cost $2.40 to implement the strategy, with potential profit of 317 percent on a drop to the lower price. (See the discussion of vertical spreads in our Education section for more.)

The IBB fell 0.86 percent to $194.73 yesterday but is up 42 percent so far this year. The exchange-traded fund has been drifting lower since touching an all-time high of $196.97 last week. The fund's largest holdings include Amgen, Celgene, and Gilead Sciences.

Total option volume was nearly triple the daily average in the session, according to the Depth Charge. Puts outnumbered calls by a bearish 32-to-1 ratio.

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