Canopy Growth Options Bulls Win Big on Constellation Brands News

The $4 billion investment brings STZ stake in CGC to 38%

by Karee Venema

Published on Aug 15, 2018 at 10:12 AM

The shares of Canopy Growth Corp (NYSE:CGC) are soaring, after Constellation Brands (STZ) said it will invest an additional $4 billion in the Canada-based medical marijuana firm -- bringing its CGC stake to 38%. The drinkmaker expects to begin distributing cannabis-based beverages and sleep aids in Canada next year, but does not have plans to market in the U.S. until nationwide legalization of marijuana use occurs. Separately, CGC earnings were released last night.

In reaction, Canopy Growth stock is up 30% to trade at $32.00, on track for its best day ever. However, the shares are still trading a few points below their June 22 record high of $36.55, and continue to stare up at the $34-$35 neighborhood -- which has kept a tight lid on CGC this year.

Today's bull gap has sparked accelerated activity in CGC's already crowded options pits, with more than 23,000 options on the tape so far, versus an average daily volume of fewer than 6,500. More broadly, total open interest is at a 52-week peak, with 56,279 calls and 19,236 puts currently outstanding.

Drilling down, the August 30 call is one of the equity's top open interest positions, and it looks like a number of these options were purchased back on July 23 for a volume-weighted average price of $0.40. This morning, the ask price for the front-month calls -- which expire at this Friday's close -- is $3.20, meaning those who bought the options a few weeks back are staring at a substantial profit.

Plus, more upside could be in store for CGC, should shorts start to jump ship. Short interest surged 10.7% in the two most recent reporting periods to 18.32 million shares -- a record high. This represents 10.7% of Canopy Growth's available float, or 6.3 days' worth of pent-up buying demand, at the average pace of trading.

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