Goldman Sachs: Hedge Biotech Stocks Now – Stocks to Watch …

By Steve Sears

Goldman Sachs is telling clients to hedge the bio-technology sector in anticipation of a sharp decline. Early Monday, the bank told clients to buy SPDR S&P Biotech ETF (XBI) December $230 puts. During the pre-market, the ETF was priced at $255, and the put was at $15.50.

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“These puts are about 10% out-of-the-money and cost about 6.2% of spot. If shares saw a 27% drawdown like they did in early 2014, these puts could have a 4-to-1 payout. If shares fell back to the levels of a year ago, these puts could have a 5-to-1 payout,” John Marshall, a Goldman Sachs derivatives strategist advised clients in a pre-market trading advisory.

With all of the nervousness about biotech valuations, options prices should be extremely high. This would reflect the sharp declines in major stocks, including Biogen (BIIB), which cratered on earnings.

But investors do not seem to have rushed to hedge bio-tech stocks or to wager on declines.

XBI’s six-month implied volatility is up 12% in the past month, but Marshall notes XBI’s implied volatility is still 12% away from its two-year high. “Investors have not yet rushed to buy puts as put-call skew has actually dropped in recent weeks and is below its two-year average,” Marshall noted.

In translation, this means SPDR S&P Biotech ETF options prices do not yet reflect the fear, and dashes of panic, that are characterizing the bio-tech sector. Options are trading without a big fear premium, enabling investors to hedge or short biotech through December without paying top dollar in the options market.

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Goldman Sachs: Hedge Biotech Stocks Now – Stocks to Watch …