Option Bears Circle Sinking Weed Stock

CTST shares are exploring record lows on a Health Canada hit

Jul 8, 2019 at 1:42 PM
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CannTrust Holdings Inc (NYSE:CTST) is at the bottom of the New York Stock Exchange (NYSE) today, after Health Canada found the medical-grade marijuana producer's Ontario greenhouse non-compliant with some regulations. The regulatory concern put a hold on more than 5,000 kg of cannabis that was harvested in five unlicensed rooms between October 2018 and March 2019, and the company put a voluntary hold on 7,500 kg of cannabis inventory. Against this backdrop, CTST shares are swimming in red ink, and options are flying off the shelves.

CannTrust Holdings stock is down 21.8% to trade at $3.87, on pace for its worst session ever. The equity also touched a new record low of $3.86 earlier. The shares debuted on the Big Board in late February, and ultimately peaked at $10.16 in mid-March, before embarking on a string of lower highs and lows.

CTST stock chart 2

So far, about 4,400 CTST puts have changed hands --  27 times the average intraday volume, and pacing for the 99th percentile of its annual range. Meanwhile, around 6,600 CTST calls have traded -- 12 times the norm, and already a new all-time high, topping the previous peak of 4,665 calls exchanged on May 2.

The December 7.5 put is among the most active options, with nearly 1,300 contracts traded so far. New buyers of the puts expect the pot stock to extend its journey south of $7.50 through December options expiration. Meanwhile, it looks like some shorter-term bears may be selling to open the July 5 call, expecting CTST shares to stay south of $5 through the close on Friday, July 19, when front-month options expire.

Although CannTrust stock is on the short-sale restricted list today, several shorts are likely cheering. Short interest surged 41.3% during the past two reporting periods, and now accounts for more than 7 million CTST shares. Plus, the consensus 12-month price target on the underperformer stands at $7, representing a premium of more than 80% to current levels.

On the other hand, the equity could be vulnerable to an analyst backlash. All seven of the brokerage firms following CTST maintain "buy" or better opinions, leaving the door wide open for potential downgrades.


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