Biotech’s a new heartthrob for traders
08/31/17

Just like that, traders have a new heartthrob.

If there’s one thing that can be said about 2017, it’s that this has been a year of shifting affections. Tech came first as investors embraced a smartphone boom and e-commerce triumphed over brick-and-mortar. Then money streamed into global stocks as almost a decade of resentment towards the sector faded. There was also a brief time when banks could do no wrong. Even utilities have been given the time of day recently.

This week, markets have a twinkle in their eye for biotechnology stocks. The crush has been sudden and intense, fed by a cascade of headlines and events:

  • Monday, August 28: Love was in the air as Gilead Sciences (NASDAQ: GILD) agreed to buy cancer-drug developer Kite Pharma (NASDAQ: KITE) for a 29 percent premium.1 
  • Just like that the matchmakers went into overdrive as investors buzzed over the next paring. Yep, that means you, Juno Therapeutics (NASDAQ: JUNO), and you, bluebird bio (NASDAQ: BLUE).2 
  • Tuesday, August 29: The Amex Biotech Index clawed back from an early drop to climb more than 1 percent. That resulted in a so-called “bullish engulfing candle,” and was followed by a new two-year high the next session. The benchmark is also on pace for its best week since late June. 
  • Wednesday, August 30: The sweet nothings continued as regulators ok’d a new kind of gene-therapy promising to usher in a new era of cancer treatment.3 All the while, analysts cheered for GILD’s engagement to KITE, saying it would breathe new life into a former growth darling that’s fallen on hard times.4
Gilead Sciences (GILD) 1/6/17 - 8/29/17 chart

Source: OptionsHouse by E*TRADE.

Options traders didn’t wait for invitations to the wedding. Emboldened by the Street’s blessing, they amassed roughly 10,000 October 80 calls for $0.87 to $3.27 and more than 6,000 of the super-short term 1-September 80 calls for $0.20 to $0.90. Calls fix the price where investors can buy a security, allowing them to profit from a rally with limited capital at risk. They can leverage a quick surge higher but also go worthless if no move occurs. 

The activity was so frenzied that GILD was the third-busiest company in the options market all day–up from its usual place around No. 50, based on average monthly volumes. Upside calls outpaced downside puts by almost 3 to 1. On top of all that, the stock’s 50-day moving average recently crossed above its 200-day moving average for the first time in almost two years. Oh Golden Cross, how traders have yearned for thee!

To sum it up: After a whirlwind romance, biotech is warming some hearts again.

 

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1. Reuters: Gilead to buy Kite for promising cancer therapies in $12 billion deal. 8/28/17.

2. Marketwatch: Biotech stocks surge on Gilead's Kite Pharma acquisition. 8/28/17.

3. Reuters: Novartis gene therapy approval signals new cancer treatment era. 8/30/17.

4. Benzinga: Analysts Weigh In On Gilead-Kite Pharma Deal. 8/29/17. Bank of America Merrill Lynch:Can this KITE fly high? 8/29/17. Credit Suisse: New chapter begins in GILD's pipeline potential with Kite acquisition. 8/28/17. Credit Suisse: Adding Kite platform – new TP $85. 8/29/17.