Trader looks for health care to keep climbing wall of worry

There’s an adage that stocks climb a “wall of worry”, suggesting that markets can rise when fear is widespread.

That seems to be the case in the health care sector, which began 2017 under a cloud of uncertainty as politicians debated repealing the 2010 Obamacare statute. But it’s steadily come to life and is now a red hot area in the market, with the Health Care Select Index up 10 percent on the year.

At least one big investor looked for that trend to continue as large blocks of calls were rolled in the sector-tracking SPDR Health Care Fund (NYSE Arca: XLV). It occurred in two contracts, with 23,00 March 76 calls sold for an average price of $0.42 and a matching number of April 76s purchased for $1.11.

Buying calls fixes the price where a security can be purchased over a certain period of time, ensuring holders don’t miss a rally. Wednesday’s trader may expect the political debate to be concluded in a way that's favorable to the industry, but is unsure of timing. Rolling their position potentially helps protect them against near-term volatility and provides an extra month for a rally to occur. Making the adjustment cost an incremental $0.69, but even a small drop could render their options worthless.

XLV rose to $76.59 yesterday, its highest close since August 2015. Gains have been well dispersed across the portfolio, with biotechnology firms like Amgen (NASDAQ: AMGN) and Illumina (NASDAQ: ILMN), medical device-makers like Intuitive Surgical (NASDAQ: ISRG) and Abbot Laboratories (NYSE: ABT), and service providers like Tenet Healthcare (NYSE: THC) and Cerner (NASDAQ: CERN) all up more than 15 percent since the year began.

SPDR Health Care Fund (XLV)

Source: OptionsHouse by ETRADE

The move apparently began on January 31 after President Trump told industry executives he wants to cut regulation1. XLV had a bullish engulfing candle the same day, meaning it made both a lower low and higher high. That’s commonly viewed as a reversal pattern -- especially when it occurs on high volume. There have also been hopes for new-drug approvals, takeover chatter, positive analyst opinions, and strong earnings.

Overall option volume in the fund was more than 30 times the past month’s daily average in XLV. Calls outpaced puts by 6-to-1.

In summary, buyers have found opportunities by looking past the headline risk in health care this year and one big trader sees more potential gains in the next month.

1. Volatile biotech trade illustrates Trump’s ability to shift sentiment on a dime. 1/31/17