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Derivative Activity in Biotech Stocks Is Raising Red Flags
Be wary of highly volatile stocks that are being disguised as low-risk buys.
Fil Zucchi    

This article was originally posted on the Buzz & Banter where subscribers can follow over 30 professional traders as they share their ideas in real time. Want access to the Buzz plus unlimited market commentary? Click here to learn more about MVPRO+.

In one of the most reliable signals that the move in a given sector is reaching its end, Bloomberg reports that Structured Notes tied to the iShares Nasdaq Biotechnology Index (NASDAQ:IBB) have jumped six-fold from the same period last year.

Gold was the latest and perhaps most egregious example of investors piling into structured products near the highs, with the lure of high yields and/or limited downside.  In practice, the buyers of these products tend to be risk-averse types who want to play with sharp objects under the mistaken impression that the risks of any losses are negligible.  Unfortunately, once the underlying security starts falling and the losses become real, they also tend to bail en-masse, sometimes exacerbating the downward move. 

For now, the size of the issuance of structured notes tied to biotech names is relatively small, so it probably would not impact the overall sector in a downturn.  But the warning flag being raised by the fact that very volatile stocks are being dressed as yield plays and sold to people unsuspecting of the risks, is bright red and inescapable.

I continue to be long selected high-confidence names, such as Biomarin (NASDAQ:BMRN), Medivation (NASDAQ:MDVN), and Gilead (NASDAQ:GILD), versus a very healthy dose of biotech index shorts.

Twitter: @FZucchi
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Positions in IBB GILD MDVN BMRN.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Derivative Activity in Biotech Stocks Is Raising Red Flags
Be wary of highly volatile stocks that are being disguised as low-risk buys.
Fil Zucchi    

This article was originally posted on the Buzz & Banter where subscribers can follow over 30 professional traders as they share their ideas in real time. Want access to the Buzz plus unlimited market commentary? Click here to learn more about MVPRO+.

In one of the most reliable signals that the move in a given sector is reaching its end, Bloomberg reports that Structured Notes tied to the iShares Nasdaq Biotechnology Index (NASDAQ:IBB) have jumped six-fold from the same period last year.

Gold was the latest and perhaps most egregious example of investors piling into structured products near the highs, with the lure of high yields and/or limited downside.  In practice, the buyers of these products tend to be risk-averse types who want to play with sharp objects under the mistaken impression that the risks of any losses are negligible.  Unfortunately, once the underlying security starts falling and the losses become real, they also tend to bail en-masse, sometimes exacerbating the downward move. 

For now, the size of the issuance of structured notes tied to biotech names is relatively small, so it probably would not impact the overall sector in a downturn.  But the warning flag being raised by the fact that very volatile stocks are being dressed as yield plays and sold to people unsuspecting of the risks, is bright red and inescapable.

I continue to be long selected high-confidence names, such as Biomarin (NASDAQ:BMRN), Medivation (NASDAQ:MDVN), and Gilead (NASDAQ:GILD), versus a very healthy dose of biotech index shorts.

Twitter: @FZucchi
< Previous
  • 1
Next >
Positions in IBB GILD MDVN BMRN.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
More From Fil Zucchi
Derivative Activity in Biotech Stocks Is Raising Red Flags
Be wary of highly volatile stocks that are being disguised as low-risk buys.
Fil Zucchi    

This article was originally posted on the Buzz & Banter where subscribers can follow over 30 professional traders as they share their ideas in real time. Want access to the Buzz plus unlimited market commentary? Click here to learn more about MVPRO+.

In one of the most reliable signals that the move in a given sector is reaching its end, Bloomberg reports that Structured Notes tied to the iShares Nasdaq Biotechnology Index (NASDAQ:IBB) have jumped six-fold from the same period last year.

Gold was the latest and perhaps most egregious example of investors piling into structured products near the highs, with the lure of high yields and/or limited downside.  In practice, the buyers of these products tend to be risk-averse types who want to play with sharp objects under the mistaken impression that the risks of any losses are negligible.  Unfortunately, once the underlying security starts falling and the losses become real, they also tend to bail en-masse, sometimes exacerbating the downward move. 

For now, the size of the issuance of structured notes tied to biotech names is relatively small, so it probably would not impact the overall sector in a downturn.  But the warning flag being raised by the fact that very volatile stocks are being dressed as yield plays and sold to people unsuspecting of the risks, is bright red and inescapable.

I continue to be long selected high-confidence names, such as Biomarin (NASDAQ:BMRN), Medivation (NASDAQ:MDVN), and Gilead (NASDAQ:GILD), versus a very healthy dose of biotech index shorts.

Twitter: @FZucchi
< Previous
  • 1
Next >
Positions in IBB GILD MDVN BMRN.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
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