Here’s how you can find some protection in biotech

The biotech sector could be on its way down, according to an options trade that sees the sector dropping 3 percent by October.

On Monday, when the S&P biotech ETF was trading at $65, one trader bought 5,000 of the October 63-strike puts for $1.84 each or $184 per options contract. This means that the trader sees XBI moving down to $63 or lower by October expiration.

But Dan Nathan of RiskReversal.com makes clear that the trade may not be entirely bearish, and the trader could in fact just be buying protection in light of a potentially volatile market.

"Maybe you want to buy some protection into what could be headwinds with these presidential debates coming out," he said Monday on CNBC's "Fast Money."

Nathan also charts the XBI to show that the ETF may actually not see too much of a downside even if it does fall. On a one-year chart of the XBI, Nathan points out that the ETF had in fact broken out of a consolidation over the past few months to hit $65.

On a long-term chart of the XBI, the ETF looks to finally be reversing a downtrend that had been in place since it hit its all-time high in July 2015.

XBI surged more than 2 percent on Tuesday morning as pharma giant Allergan reached a $1.7 billion deal to buy Tobira Therapeutics.

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  • Melissa Lee

    Melissa Lee is the host of CNBC's “Fast Money” and “Options Action.”

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