The markets have been relatively stagnant since last Friday, and we're on the cusp of a wave of economic data, starting this morning with durable goods orders. Could this data spur market movement? Absolutely. However, as mentioned in yesterday's discussion, we're observing backwardation in realized volatility, a situation unlikely to persist for long.
Today, we're exploring another interesting setup for volatility sellers, focusing on XBI this time. XBI offers exposure to the biotech sector, a realm famed for its volatility and the potential for its constituents to experience drastic swings within a single day.
Let's dive in.
We're not biotechnology experts; we've generally kept a distance from these stocks—even during the COVID era. However, we excel at analyzing volatility to unearth compelling trading opportunities.
Like much of the market, XBI experienced a significant bull run since November 2023, surging almost 50% within four months! Concurrently, its realized volatility has been on a decline, currently standing at 31%, which is on the lower end of its two-year average.
Despite this relative tranquility in the sector, it's improbable that volatility sellers have adjusted their prices downward to reflect the reduced risk in the indices. If the sector remains calm yet the cost of insurance remains elevated, this discrepancy offers an excellent opportunity to consider short volatility positions.
Let's dive into the data to explore this setup further.