Exploring Your Options

September 01, 2005

Intriguing New Biotech Index Options

Investing in early-stage biotechnology is a binary business. When clinical trial data comes out, things tend to go either really well or really poorly: Either your company's new drug is a cure for cancer, or it's totally worthless. Not surprisingly, stocks react violently to these binary events.

All of which makes the new biotech index options launched by the PHLX on May 24 very interesting. The options are based on a new index called the WellSpring Bio-Clinical Trials Index, which is composed of 22 developmental biotech companies with products in late Phase 2 or Phase 3 clinical trials, the last two stages of clinical trials. Unlike the dominant biotech indexes (the Amex Biotech Index and the Biotech Holdrs), which are heavily weighted towards profitable biotech giants, the companies in the Wellspring index are relatively small, with an average market capitalization of $750 million and few (if any) products on the market.

For options traders, who search out volatility like bees search out pollen, this index offers real potential: Not only will individual index components make big moves when clinical data comes out, but experience suggests that that entire index will move in sympathy.

A First In Philly

The PHLX scored an indexing coup at the end of May by announcing plans to roll out the first-ever options contracts on eight popular iShares ETFs. The contracts launched June 1 and cover the:

• iShares S&P Global 100 Index (IOO)

• iShares S&P Global Energy Sector Index (IXC)

• iShares S&P Global Financial Sector Index (IXG)

• iShares S&P Global Healthcare Sector Index (IXJ)

• iShares S&P Europe 350 (IEV)

• iShares S&P Global Information Technology Sector Index (IXN)

• iShares S&P Global Te lecom Sector Index (IXP)

• iShares S&P TOPIX 150 (ITF) PHLX now offers contracts on 21 iShares

ISE Launches More Index Options; New Indexes Too

ISE continued to expand its presence in the indexing world in July, debuting options on its proprietary ISE 50, ISE 100 and ISE 250 indexes, which track the most actively traded options on the exchange. ISE also began trading options on the Russell 1000 and 2000 indexes, as well as a mini-Russell 2000 contract.

Earlier, the innovative exchange rolled out a number of new sector-based indexes, including the SINdex, a complication of companies involved in the alcohol, tobacco and gambling industries.

A second index, called the ISE B i o-Pharmaceutical Index, combines for the first time in a single index the world's largest biotechnology companies with the world's largest pharmaceutical firms. Traditionally, indexers have segregated these two sectors, based on the historical notion that biotech companies are speculative firms with few pro fits and pie-in-the-sky dreams. But today, established biotech companies like Genentech and Amgen post billions of dollar in annual revenues and share more in common with their established pharmaceutical peers than with their speculative biotech cousins.

A third sector index covers the U.S. Regional Bank industry.

 

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