$XBI puts rack up sixfold gains

The SPDR S&P Biotech Fund has seen its share price plunge by more than a third in the last four months, handing major profits to bearish option traders.

On Dec. 4, Investitute’s tracking systems detected the purchase of 5,000 January $77 puts for $1.80 as part of a bearish spread with shares at $81.77. Volume was far above the strike’s previous open interest of 1,677 contracts, showing that this was a new position.

Those puts sold for $11.98 today, more than 6.5 times their purchase price. The stock fell 20.34% in the same time frame, illustrating how quickly options can far outperform moves in their underlying shares on a relative basis.

Long puts lock in the price where a stock can be sold no matter how far it might drop, gaining value in a selloff with the potential for significant leverage. The contracts can be purchased either as an outright bearish bet or a hedge on a long-stock position.

XBI was down 0.49% today to close at $65.42. The exchange-traded fund was trading above $100 as recently as early September.