The problem with the broad-based selling, however, is not all stocks in the sector are overvalued—including many of its leaders. Amgen is now trading at 14 times its 2015 estimated earnings, while Biogen is trading at 17 times earnings, and Gilead Sciences at a mere 8 times 2015 earnings. All three have been knocked down between 8% and 10% during the past week. Do you also think that biotech is a bubble?
The Biotech Bubble.
- Thread starter Lloyd W. Coutee
- Start date
Instead of telling you whether or not I think a sector is overvalued, which, to be honest, I don't know (no one knows), let me talk to you about strategy.
If you like the biotech sector but think that it could still have some room to fall (timing uncertainty), consider putting on your position using laddered puts. So, if you wanted to put on 4 tranches, you may purchase 1 tranche today and also sell the equivalent of 1 tranche of puts at one strike, then go out to next month and sell another tranche at the same delta strike, then go out another month and sell the third tranche at the same delta strike.
This way, if you are right and you have picked the bottom in the biotech sector, you get to reduce your cost basis by collecting money on the now junky puts. However, if you are wrong and the biotech sector continues to fall, the sold put continues to force you to exercise at the lower price (assuming you take assignment). Of course this all assumes that you like the biotech sector and want to start building a position today.
If you like the biotech sector but think that it could still have some room to fall (timing uncertainty), consider putting on your position using laddered puts. So, if you wanted to put on 4 tranches, you may purchase 1 tranche today and also sell the equivalent of 1 tranche of puts at one strike, then go out to next month and sell another tranche at the same delta strike, then go out another month and sell the third tranche at the same delta strike.
This way, if you are right and you have picked the bottom in the biotech sector, you get to reduce your cost basis by collecting money on the now junky puts. However, if you are wrong and the biotech sector continues to fall, the sold put continues to force you to exercise at the lower price (assuming you take assignment). Of course this all assumes that you like the biotech sector and want to start building a position today.
Exactly right. "X times earnings" is backward looking. There's fear -- warranted or not, who knows -- that Hillary will decimate pharma earnings over the next eight years.
Of course it is a bubble.
When everyone wants to buy whatever it costs, it is called bubble.
Remember, Nasdaq Biotech increased +520% in 6 years. We don't speak about a stock, we speak about a sector. Only Nasdaq composite showed better returns (+600% between 1994 and 2000). And everyone knows how big the bubble was, right?
Moreover, asking this question NOW after a small -28% decrease means some people are "beginning to awake", or even worry. But no one is scared. No way. Too early.
But, as every bubble, don't expect -28% to be enough. -60% / -70% should be closer to reality.
CM
When everyone wants to buy whatever it costs, it is called bubble.
Remember, Nasdaq Biotech increased +520% in 6 years. We don't speak about a stock, we speak about a sector. Only Nasdaq composite showed better returns (+600% between 1994 and 2000). And everyone knows how big the bubble was, right?
Moreover, asking this question NOW after a small -28% decrease means some people are "beginning to awake", or even worry. But no one is scared. No way. Too early.
But, as every bubble, don't expect -28% to be enough. -60% / -70% should be closer to reality.
CM
I've been shorting Biotech since March. All I can say is that it is super hard/annoying to short since the spreads on the puts of IBB and XBI are very wide and expensive.
When I want to short shares of IBB and XBI, for the past 4 days they are not available to short on my broker, Optionshouse so I have to either buy wide puts or short through a leveraged ETF, BIS.
If you have most of your money on IB, it will be easier to short and make it a huge part of your portfolio. If you look at the past 2 days, even with the huge rally in NQ biotechs tape have been really weak. Even this morning it's making NQ weaker relative to the Dow and Russell.
When I want to short shares of IBB and XBI, for the past 4 days they are not available to short on my broker, Optionshouse so I have to either buy wide puts or short through a leveraged ETF, BIS.
If you have most of your money on IB, it will be easier to short and make it a huge part of your portfolio. If you look at the past 2 days, even with the huge rally in NQ biotechs tape have been really weak. Even this morning it's making NQ weaker relative to the Dow and Russell.
In this choppy mkt, fortunes will be made by nimble traders riding biotech swings. But it's like trying to catch fish in a hurricane.
biotechs on the brink of big breakdown? 3+ year trendline getting tested repeatedly here
Man, Biotech bubble will burst, for any reason. Hillary, Obama, Yellen, Soros, the Pope? Who cares. These are nice stories for the herd. But reality is that there are more sellers than buyers. Period.
CM
Oh, so that's why it dropped! Very insightful. I'll have to write that down.