• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Bruce Kamich
    • Doug Kass
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • TheStreet Smarts
  1. Home
  2. / Investing
  3. / Options

I'm 'Following Up' on a Biotech Trade With Attractive Potential

Hundreds of small biotech stocks are trading at levels below the cash on their balance sheets right now.
By BRET JENSEN
May 29, 2022 | 02:15 PM EDT
Stocks quotes in this article: XBI, GRPH

Just before noon ET on Friday, May 27, Doug Kass posted the following in his Daily Diary on Real Money Pro: 

"I added to SPDR S&P Biotech ETF (XBI)  this morning.

And I sold some attractively priced calls against it."

This piqued my interest. 

I have been slowly adding to my XBI holdings via covered calls for several months now. I have no doubt this will be a good trade over the long run, but Doug is more renowned for his market timing than me so I followed him into this trade on Friday with some additional buy-write orders on the XBI.

There are several reasons to believe the XBI has indeed finally hit a bottom after falling some 60% from where it began 2021. First, from a technical perspective, the ETF seems to have formed a bottom here in the back half of May.

Second, the small and mid-cap biotech space has gotten more than dirt cheap. Take Graphite Bio (GRPH) , for example. This early-stage gene-editing developmental concern has been beaten down to the point where it has an approximate $130 million market capitalization. As of the end of the first quarter, the company had approximately $350 million in net cash on its balance sheet. Graphite Bio is one of hundreds of small biotech stocks trading at levels below the cash on its balance sheet at the moment.

The only similar occurrence I can recall in any sector like this was around small internet stocks at the end of the Internet Bust. I remember picking up a small search engine company called Ask Jeeves (ASKJ) in either late 2001 or early 2002 for two bucks a share. It had $3.75 a share in net cash on its balance sheet at the time. In 2005, it was bought out for $26.00 a share.

A similar cheapness across the biotech sector is starting to trigger a pickup in M&A transactions. Most of these are small in nature for the moment, but they are likely to increase significantly in the back half of 2022. Big Pharma certainly has a huge amount of cash and financial flexibility to expand their footprint in oncology, rare disease, CNS and other niches of the market in a major way.

How can an investor take advantage of this?

Given the beating biotech has taken in recent quarters, an investor is likely to make more through year-end buying solid individual biotech stocks if we manage to have just a neutral investment environment going forward. However, the following trade provides a more than solid return and offers significant risk mitigation and diversification.

Option Strategy

Here is how one can initiate a position in XBI via a covered call strategy. Covered call orders involve buying an equity and simultaneously selling just out of the money call strikes against the new position.

Using the December $70.00 call strikes, fashion a covered call order with a net debit in the $60.20 to $60.40 a share range (net stock price - option premium). This strategy provides 15% of downside protection as just over that as potential upside even if the stock declines a bit over the option duration.

(Please note that due to factors including low market capitalization and/or insufficient public float, we consider GRPH to be small-cap stocks. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.)

(Bret Jensen is a regular contributor to Real Money Pro. Click here to learn more about this dynamic market information service for active traders and to receive daily columns and trade ideas from Paul Price, Doug Kass, Peter Tchir and others.)

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Jensen was long XBI.

TAGS: ETFs | Investing | Options | Small Cap | Trading | Biotechnology | U.S. Equity

More from Options

Sealed Air Is Ready to Pop

Paul Price
Jan 27, 2023 7:00 AM EST

Just like its bubble-wrap, Sealed Air Corp. is ready to make some noise. Let's see how to play it.

In the Wild World of Crypto, a Wild Bitcoin Play Is the Best Call

Mark Abssy
Jan 26, 2023 1:24 PM EST

The situation for bitcoin investors right now is tough, but as we look at the crypto exchange-traded funds and the digital currency, I see one good 'option.'

In Case You Missed the Rags-to-Riches Netflix Show ...

Paul Price
Jan 26, 2023 7:00 AM EST

If you think NFLX at current prices is a buy, then you better read my lesson on equity investing.

I'm Enchanted With Forrester

Paul Price
Jan 25, 2023 7:00 AM EST

No matter who works the numbers on FORR, reward appears to dwarf risk from this depressed price point.

This Health Care Stock Has Just What the Doctor Ordered

Paul Price
Jan 24, 2023 7:00 AM EST

Revive your portfolio with Baxter International.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 11:48 AM EST REAL MONEY

    Watch Doug Kass on the Daily Rundown!

    In today's Action Alerts PLUS Daily Rundown, Doug ...
  • 11:03 AM EST JAMES "REV SHARK" DEPORRE

    This Weekend On Real Money

    It's time to start using this power to build great...
  • 03:06 PM EST BOB LANG

    LEAPS Webinar

    This week, I offered a free webinar session talkin...
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2023 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login