3 Weed Stocks Lighting Up the Options Pits

Short sellers may be covering bets on CGC, CRON, and TLRY

by Karee Venema

Published on Dec 31, 2019 at 2:11 PM

Weed stocks are running red hot today, with the shares of Canopy Growth Corp (NYSE:CGC), Cronos Group Inc (NASDAQ:CRON), and Tilray Inc (NASDAQ:TLRY) all notably higher. While no specific catalyst has been identified, it's possible short sellers may be covering their massive positions on the three names. Whatever the reason, the price action has options traders in overdrive, with most of the activity taking place on the call side.

Canopy Growth -- which has 21.2% of its float controlled by short sellers -- was last seen trading up 11.5% at $20.95, set to close above its 10-day moving average for the first time since Dec. 17. Roughly 83,000 calls and 23,000 puts have changed hands, three times what's typically seen at this point.

The January 2020 20-strike call is most active, and it looks like new positions are being bought to open here for a volume-weighted average price (VWAP) of $1.20. If this is the case, breakeven for the call buyers at the close on Friday, Jan. 17, is $21.20 (strike plus premium paid), when the front-month options expire.

Cronos stock is 16% higher to trade at $7.68, likely catching several short sellers off-guard. The 61.16 million shares sold short account for almost 35% of the equity's available float.

In the options pits, 55,000 calls and 18,000 puts are on the tape, which is five times the expected intraday amount and total options volume pacing in the 97th annual percentile. Buy-to-open activity is detected at the weekly 1/3 8-strike and January 2020 7-strike calls, meaning speculators are anticipating bigger short-term gains for the cannabis stock.

Tilray shares have popped 9.5% to trade at $17.18, bouncing off yesterday's record low of $15.56. A round of short covering could keep the wind at TLRY's back, too, considering it would take bears nearly a week to cover the 7.87 million shorted shares, at the stock's average pace of trading.

Options traders see even bigger gains in the short term. Amid heavy call volume -- 30,000 contracts have traded, three times the average daily volume -- the weekly 1/3 17-strike is active. It looks like traders may be purchasing the positions for a VWAP of $0.41, which makes breakeven $17.41.

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