It doesn’t take an advanced degree in finance to recognize the huge risks associated with cannabis specialist Canopy Growth (CGC). Once considered the crown jewel of the “botanical” ecosystem, CGC stock has fallen dramatically from grace. At the moment, the company carries a market capitalization of only a bit over 736 million CAD (about $543 million at current exchange rates).
Even worse, CGC stock – which trades at only 76 cents – has been overshadowed by its rivals. In particular, Curaleaf (CURLF) commands a market cap of 3.33 CAD (or roughly $2.46 billion). Adding insult to injury, the Barchart Technical Opinion indicator rates it a 56% Buy. On the other hand, CGC symbolizes a 16% Weak Sell. If one was looking for a confidence boost, that wasn’t it.
Believe it or not, it gets worse. Curaleaf shares sit modestly below parity for the year. However, CGC stock absolutely cratered, hemorrhaging more than 67% of equity value since the January opener. Again, it doesn’t require much intuition to understand the heightened risk profile for Canopy compared to its more credible rivals.
Nevertheless, Canopy isn’t going down without a fight. In a bid to streamline its operations, the company recently completed the sale of its BioSteel sports drink in two separate transactions. Gross proceeds came out to 30.4 million CAD ($22.4 million).
Of course, as Barchart content partner The Motley Fool stated, while CGC stock appears compelling, better options exist. Fundamentally, it will be difficult and expensive to break into new markets. Subsequently, the bears are skeptical about Canopy – and that skepticism may be what drives shares higher.
Unusually Bearish Bet Against CGC Stock Could Undermine the Pessimists
Following the close of the Dec. 4 session, CGC stock ranked among the top securities based on unusual options volume. Specifically, total volume reached 132,147 contracts versus open interest of 472,758 contracts. Against the trailing one-month average metric, Monday’s volume count represented a sizable increase of 687.95%.
Seemingly an enticing proposition for the bulls, the breakdown points to call volume hitting 129,906 contracts versus put volume of only 2,241. On paper, this pairing yields a put/call volume ratio of only 0.02X. At face value, the tremendous interest in call options – which allows holders the right but not the obligation to exercise the contract at the listed strike price – suggests robust optimism.
However, it’s also important to realize that with derivatives, there’s always someone on the other end of the deal. In other words, for every bought call, there is a countervailing sold call. Therefore, a comprehensive investigation will involve considering options flow or filtering out which trades represent big block trades likely made by institutions and which ones are “mom and pop” retail trades.
Drilling into the details, a major entity (or entities) sold 18,986 contracts of the Jan 19 ’24 1.00 Call. For those unaccustomed to the lexicon, certain traders are betting that by the expiration date of Jan. 19 of next year, CGC stock will not materially rise above the strike price of $1. If it does and the countervailing call holders exercise the option, traders must sell CGC at $1, irrespective of the actual open market price.
Now, each option contract carries the leverage of 100 shares of the underlying security. Therefore, the risk exposure centers on 18,986 contracts multiplied by 100 or nearly 1.9 million shares of CGC stock. Enticingly for the optimists, CGC closed on Monday at 76 cents as stated above. So, a few more powerful sessions and the bears might need to consider covering their short position.
For speculators, that’s a huge incentive to dive into Canopy Growth stock.
Oh Yeah, It Gets Even Juicier for the Bulls
Adding more fuel to the fire, the aforementioned sold call isn’t the only bearish bet of its nature in the options flow screener. Earlier on Monday, institutional investors piled heavily into the Jan 17 ’25 2.50 Calls – we’re talking 44,475 contracts worth. That means call sellers (writers) will be on the hook until Jan. 17, 2025, regarding any upswing in CGC stock.
To be fair, the $2.50 strike price is well off from 76 cents. However, given the unpredictability of Canopy shares, it wouldn’t be unreasonable to see wild speculation drive this trade dramatically higher. And keep in mind that call writers have the obligation (but not the right) to fulfill the terms of the contract.
In other words, if call writers want to exit their trade, they have two basic approaches: either buy the call that they originally sold (at a premium of course) or buy the underlying security at the open market price to cover the risk.
Either way, that should be bullish for CGC stock, which means that for optimists, this is a counterintuitive trade that you don’t want to ignore.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
