Trading strategies come in all shapes and sizes, and the key is to find ones that resonate with your own trading style and risk tolerance. One such strategy that has been successful for traders like Dennis “DDD” Dick is betting long on XBI (the SPDR S&P Biotech ETF) over the weekend. This strategy is predicated on the observation that acquisition deals in the biotech sector are often announced on Mondays.
The Strategy
This strategy is a play on potential M&A (Merger and Acquisition) activity in the biotech sector. The idea is to be long on the XBI ETF, which is equally weighted, into the weekend. This is because acquisition deals in this sector are usually announced on a Monday. If one or two companies within the XBI get taken over, the ETF could see an oversized move.
While a 1% return might not sound like a lot, the advantage with this kind of strategy is that you can put on bigger size. XBI is an ETF, so it has a lot of liquidity compared to individual stocks, plus the risk is spread across many different symbols. This reduces the potential impact of slippage or if any one stock happens to perform poorly.
There’s never a guarantee a trade will work out every time, but this trade has a history of working. For instance, when Novartis announced its acquisition of Chinook Therapeutics at $40 a share, the XBI traded up more than 1%. While the trade was over for KDNY, the fact that a company within the XBI was acquired led to an increase in the ETF’s value.
XBI vs. IBB
The XBI and the iShares Nasdaq Biotechnology ETF (IBB) are two major biotech ETFs, but they have some key differences. The IBB is more focused on larger biotech companies, like Amgen and Biogen, while the XBI is centered on smaller companies and is equally weighted.
This equal weighting means that if there’s a takeover in the biotech sector, the XBI is likely to benefit over the IBB. One potential strategy is to go long XBI and short IBB on Friday at/near the close, holding over the weekend. This is again based on the hypothesis that larger biotech companies are often the ones acquiring smaller ones, with the smaller companies benefiting more than the larger ones in terms of stock price.
The XBI contains around 150 smaller biotech companies, making it a strong play for this particular strategy.
Takeaways
As with any trading strategy, this strategy doesn’t guarantee profits. It doesn’t work every weekend, but if it works more than half the time, it could be a profitable strategy. The key is understanding why the strategy is implemented and how it works.
Traders who engage in this strategy are essentially betting on the likelihood of M&A activity over the weekend. They leverage the equally weighted nature of the XBI to spread risk and potentially benefit from any takeover announcements made on Monday. Traders who would rather hedge off broader market risk could also short IBB over the weekend in a pair trade.
While this strategy may not suit everyone’s trading style or risk tolerance, it’s an interesting example of how traders can seek to find alpha in the market by understanding and capitalizing on industry trends and behaviors.
