Looking to play Healthcare with $BIIB and $ILMN

Welcome to Karpel’s Corner. This is where I throw out my thoughts on the markets and share some of my favorite strategies. I keep it market-focused, and never miss an opportunity to teach trading strategies and commentate on the latest trends affecting the financial markets. Hope you enjoy today’s post!

The Healthcare sector ($XLV) has been screaming to the upside since bouncing from the October lows. Currently, $59.25 on the $XLV, over 18 percent to the upside. $XLV is extended at these levels. This means it would be hard to buy the sector at these high prices. The strength of this sector overshadows the reservations of buying.

While the sum is trading at rich levels I try to find the parts, single stocks in the sector, that have lagged the sector bounce. I look for stocks prime for an upside opportunity.

Biogen Idec ($BIIB) and Illumina Inc. ($ILMN) popped up on my bullish screen in Drug and Healthcare sectors. Both of these stocks have the highest long-term bullish rating of 10 and short-term bullish ratings of 7 and 10, respectively.

For $BIIB, I am looking to buy one $BIIB Jan15 $325 call and sell one $BIIB Dec14 $337.5 call for $11.55 debit, $1155 per contract. This debit is the full risk of the trade and the reward would be $605, if the Stock is trading at $337.50 at December Expiration.

For $ILMN I am looking to deploy a similar strategy, a Diagonal Spread. I want to Buy one $ILMN Jan15 $180 call and sell one $ILMN Dec14 $197.5 Call for a debit of $11.66, $1166 per spread contract. This is the total risk of the trade until December expiration. The max profit, $726 per contract, would be recognized if the stock was trading at $197.50.

I will follow up in a few weeks to see how these spreads are trading. See you next time at the Corner!