Bio-tech Stocks Are Oversold, But They Haven’t Bottomed Yet

Discussion in 'Stock Market Forum' started by inthemoneystocks, Apr 7, 2014.

  1. inthemoneystocks

    inthemoneystocks Member

    Mar 2014
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    One of the hottest stock sectors in 2013 was the bio-technology stocks. Leading bio-tech stocks such as Celgene Corp (CELG), Gilead Sciences Inc. (GILD), Vertex Pharmaceuticals Incorporated (VRTX), and Amgen Inc (AMGN) were some of the biggest winners last year. So far in 2014, this high growth industry group has been in correction mode. Many of the leading bio-tech stocks are now trading lower by 20.0 percent or more since the start of the new year. While it is safe to say that the bio-tech sector is severely oversold, this important industry group has not yet bottomed out.

    Traders and investors can expect minor bounces in the bio-tech stocks from current levels, but it is not a true bottom in the industry group just yet. Remember nothing in the stock market goes down or up in a straight line. One of the ways that traders and investors can play the entire bio-tech sector is to use and follow the iShares NASDAQ Biotechnology Index ETF (IBB). At this time, the IBB is signaling downside to the $202.00 level. This is an area where the institutional money will likely come back in and support the bio-tech stocks, until then the bounces in the sector are likely to be just small rallies from an oversold condition.

    Nicholas Santiago

    Last edited by a moderator: Jul 8, 2016
  2. JR Ewing

    JR Ewing Super Moderator Staff Member

    Feb 2014
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    I like to do research to find smaller biotech companies that have very interesting drug pipelines. I will speculate with a few bucks in either direction with fairly long range calls and puts, because it's quite likely that these volatile companies will move sharply in either direction when drug trials and FDA decisions are either positive or negative. A $5 biotech stock will fall perhaps $2-3 on bad news, and will likely shoot up into double digits briefly on good news. I've seen biotechs in the $4-6 dollar range shoot up into the twenties on occasion on good news.

    But the news is usually released before or after market hours, so that the stock gaps higher or lower on the open if you weren't already long or short - or didn't already have the "right" to be long or short by owning put / call options on it. If the news is good and the stock goes higher, calls are exercised and puts are not. And the reverse is done if the news is bad and the stock tanks. The only risks are the small premiums paid for the options not exercised, and the slight possibility that the stock may not move either way before the options may expire.

    Because these stocks are usually low priced in most cases before the news hits, I typically buy more calls than puts. The downside is limited to 100% in the worst case scenario, but the upside is potentially unlimited - I've seen 300-600% increases literally in a day or 2 on a few names.

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