Here's how to protect your profits in biotech: Trader

It's been a record-breaking run for biotech stocks, with the Nasdaq Biotech ETF, the IBB, up 18 percent this year alone and nearly 300 percent in the past five years. But that extraordinary run has one trader running to the options market to buy protection.

"Given the outperformance of the biotech sector over the past few years, I'm looking for ways to profit from a potential pullback while limiting losses if IBB shares continue to rally," said Susquehanna's head of derivative strategy, Stacey Gilbert, on Tuesday's "Trading Nation."

What worries Gilbert most is the sector's outperformance to the broader market. "One of the periods I want to draw attention to is last March through the beginning of April when IBB shares saw an over 18 percent pullback as investors became nervous of higher-beta, momentum names," said Gilbert. "This compares to the broader market [pullback] of just over 2 percent."

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The run, Gilbert notes, has stretched valuations for many of the components in the IBB. So, in order to play for a pullback, she is looking to buy what's called a "put spread," a bearish option strategy in which a trader buys one put, and then sells another, lower-strike put in an effort to reduce the overall costs of the trade.

Specifically, for those inclined to buy protection, Gilbert highlighted purchasing the May 350-strike put for $11.10 and offsetting that cost by selling the May 330-strike put for $5.40. The trade is profitable if IBB shares fall below $344.30 by May expiration, or roughly 3.5 percent lower than current levels. To note, Gilbert is targeting May expiration to capture earnings, as many biotech names tend to see sharp moves after reports.

"With this strategy we have given ourselves downside exposure while limiting our potential losses on the upside."

Disclosure: Susquehanna is a market maker in IBB and XLV.