Options Light Up as Cannabis Craze Sweeps Market

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Marijuana’s supposed to calm people down, but that didn’t happen in the stock market yesterday.

Frenzied with Canada’s legalization on October 17, traders streamed in and out of a trio of high-profile weed stocks. The moves were epic for companies many clients had never heard of a month or two before.

Front and center, Tilray (TLRY). It opened more than $80 above Tuesday’s close. It zoomed as high as $300 on the nose, reversed into negative territory and then ended the session up 38 percent at $214.06.

The stock traversed $148.60 between its peak and trough — equivalent to a single share of software maker Autodesk (ADSK). Market cap swung by $11 billion, which roughly equals the entire value of retailer Michael Kors (KORS) or financial-exchange Cboe (CBOE).

Is it a surprise TLRY was halted at least four times between the opening and closing bells?

CEO Brendan Kennedy helped stoke the rally by suggesting the night before on CNBC that established drug and alcohol firms should invest in companies like his. “Cannabis is a substitute for prescription painkillers,” he was quoted saying. “You have to hedge the offset from cannabis substitution.”

Cronos (CRON) chart with daily options volumes and 20-day moving average.

TLRY’s options activity was off the chart, spiking above 240,000 contracts for the first time ever. Cronos (CRON), which looks to invest in medical marijuana businesses, was even more active with volume of almost 300,000 options. That put both well ahead of stalwarts like Netflix (NFLX), Tesla Motors (TSLA) and Amazon.com (AMZN).

The other pot stock, Canopy Growth (CGC), traded more than 100,000 contracts for the first time ever. None of the three weed companies saw daily volume much above 5,000 just six weeks ago.

Their combined market cap on Wednesday’s close was about $33 billion, more than 300 times revenue. Those kinds of multiples had some traders cashing out. Some expect simple profit-taking, while others anticipate a wave of new initial public offerings (IPOs) to meet the market’s strong demand.

It also bring to mind a long-running trader adage: “Buy the rumor, sell the news.” Canada’s great opening is less than a month away. How long can this buzz last with the reality of legal weed on the horizon?

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David Russell is VP of Content Strategy at TradeStation. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.