With cannabis stocks in the news this week, we’ll reveal what the options market is expecting in terms of future stock movements and see how options can play a role in potential short-squeeze situations.
Using Tilray, Inc. (NASDAQ: TLRY) As an example, we will also look at how spreads can be used in a high-premium environment to reduce capital expenditure – whatever your trading outlook.
Overview and expected movements
First, a comparison of some of the moves expected for the next month for Tilray, Canopy Growth Corporation (NASDAQ: CGC), Aurora Cannabis Inc. (NYSE: ACB), Aphria Inc. (NASDAQ: APHA) and Cronos Group Inc. (NASDAQ: CRON) through the AI Options Calculator
With Tilray (TLRY) trading around $ 55, the options market is pricing an expected move of more than 60% for the month in either direction. (note – the company is set up to report earnings in the first week of March). The movement being priced in the options corresponds to around US $ 90 for a bullish consensus and US $ 20 for a bearish one:
Short grips and option strokes
At the time of this writing, the biggest option strike near maturity is 65. As the stock goes up, bigger strikes are likely to be added (in fact, strikes are being added today in 100), but there is often a delay for short range to be restored. The term “gamma squeeze” has been used frequently in recent weeks, particularly in relation to stocks of memes. In very simple terms, it is related to the option market makers who perpetuate the upward momentum of a price fluctuation, having to buy underlying stocks to cover their short-term exposure. It follows, therefore, that when the ceiling is reached in terms of options, this range compression can (at least temporarily) be reduced.
In addition, without more out-of-money call options being available, buying definitive call options to negotiate an optimistic view of a stock like TLRY can involve high capital outlays and mean high breakeven points.
So, below, we’ll look at how option spreads can be used to reduce capital expenditure and potentially improve the likelihood of earnings (versus buying call options or put options).
Please note that any actions and / or trading strategies mentioned are for informational and educational purposes only and should in no way be construed as recommendations. The strategies described represent just a few of the many possible ways in which options can be used to express any particular vision. All prices are approximate at the time of writing.
Call spreads vs outright calls on high value stocks
Currently, TLRY March 19 65 call trading at approximately $ 20, risking $ 2,000 to buy 1 contract and implying a breakeven of approx. $ 85 on the underlying stock (when due).
Knowing that the options market is pricing a movement of more than 60% by March, and that the 65 strike is currently the highest listed, we will now see an example of a high TLRY March 19 + 55 / -65 Debit Call Spread (simultaneously buying a Call 55 while selling the Call 65). At the time of writing, this was trading at approximately $ 3.00, risking $ 300 to buy a call spread and implying a breakeven of approx. $ 58 on the underlying stock (when due).
Therefore, when using a Call Spread, we reduce the breakeven point and the premium at risk, in exchange for limiting the upside potential if the stock moves far beyond the upper strike.
In the chart below, note the breakeven point of this strategy, just a few dollars above the current stock level, via Options AI:
In addition, as you can see with the two strikes in the spread, this strategy is traded below $ 3, while call 65 is about $ 21.00:
It is important to note that the options market is pricing an equally large move on the downside. In fact, using the same methodology, Debt posting spreads can be applied in a similar way to express a bearish movement. Options AI does not recommend trading shares in TLRY and has no opinion on the future price movement of any share.
resume
Remember, the items above are just examples of the many ways that a trader can express a view using options. They are based on where the stock is being traded at the time of writing and are only intended to demonstrate how the expected move can help provide an actionable view to be considered before making any trades – especially in an uncertain event – and how it can be used. for more informed attack selection. Learning / Options AI has some free tools, including a earnings calendar with expected moves, as well as education on expected moves and spread trading. The concepts shown on Tilray can be applied to any stock and are simply used here for illustrative purposes.
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