Signal Says Buy Options Insurance on This Biotech

The shares are just off a new high, but could cool off soon, if history repeats

Exelixis, Inc. (NASDAQ:EXEL) shares are fresh off a new high, thanks to some upbeat analyst attention. Specifically, Morgan Stanley upgraded the biotech stock to "equal weight" from "underweight," and hiked its price target to $28 from $20, citing strong prescription trends among other reasons. However, if recent history is any indicator, EXEL bulls may want to consider buying options insurance to guard against a short-term pullback.

EXEL stock surged as high as $25.31 this morning, representing a new annual high. The stock has almost doubled since touching a two-year low of $13.42 in late October, with pullbacks contained by its 60-day moving average. More recently, EXEL last week barreled through recent congestion in the $23-$24 neighborhood. At last check, the security has trimmed its lead to 0.6% to trade at $24.67.

Meanwhile, Exelixis sports relatively inexpensive short-term option premiums right now. The stock's Schaeffer's Volatility Index (SVI) of 37% is higher than just 3% of all other readings from the past year, suggesting EXEL's near-term options are pricing in relatively low volatility expectations at the moment.

Since 2008, there have been six other times when EXEL shares were within 2% of a 52-week high and simultaneously sported an SVI in the bottom 20% of its annual range. After those signals, the stock was lower one-month later two-thirds of the time, averaging a loss of 5.77%, according to data from Schaeffer's Senior Quantitative Analyst Rocky White.

Against this backdrop, now could be an opportune time for Exelixis shareholders to pick up options insurance on the cheap. Specifically, traders should consider buying protective puts on EXEL, which would lock in an acceptable sale price for the shares, should they once again take a turn for the worse. From the security's current perch, another 5.77% pullback would put the biotech around $23.30 in mid-April.