With the odds the economy is heading into recession increasing by the week -- and with more financial landmines beyond Silicon Valley Bank (SIVB) likely ahead, I'm looking more closely at defensive stocks. And I just spotted a biotech fund that shows promise.
I particularly like health care as a defensive sector pick. Even in a recession, demand will remain solidly inelastic. Consumers will continue to scale back on major purchases in an economic contraction like houses, cars and travel -- they will also cut back on new clothing. But, they still will go to doctors, get procedures and buy medicine.
One way to get into this sector is through exchange-traded funds.
I will likely continue to tee up a good portion of index ETFs as covered call ideas in coming weeks, until volatility in the markets subside some and we have additional certainty that stabilization within the banking system. The main reason for this is the additional risk mitigation an ETF provides given its myriad holdings within a sector. In addition, the recent spike in volatility has increased option prices even for diversified entities like these.
I added some exposure to my SPDR S&P Biotech ETF (XBI) holdings late in the week as the ETF is getting near its June lows, which has served as a nice floor. In addition, many small biotech names are back to trading for near the net cash on their balance sheet.
But now let's look at the iShares Biotechnology ETF (IBB) as our covered call idea going into Monday. This ETF holds large and profitable names across the biotech space including Amgen (AMGN) , Gilead Sciences (GILD) , and Vertex Pharmaceuticals (VRTX) .
These are profitable, and most are already reasonably valued. Many have large cash hoards and will be adding to their pipelines on the cheap given how far some small biotech companies with intriguing developmental assets have fallen. In addition, since its debut early this century, this index has easily outperformed the overall market in each of the three recessions the country has endured since its debut on the market. This index has had a low average beta over the past five years on the monthly basis (.75) compared to something like the Nasdaq represented by the Invesco QQQ Trust (QQQ) (1.12).
Option Strategy:
To establish an initial position in IBB using a covered call strategy, do the following. Selecting the September $125 call strikes, fashion a covered call order with a net debit in the $115.00 to $115.25 a share range (net stock price - option premium). This strategy provides downside protection of approximately 8% and a bit more potential upside even if the stock does little over the six month option duration. Not a big return, but this is a low beta, defensive play making it more than acceptable in this uncertain market.
