With cannabis shares in the news this week, we will reveal what the options market expects in terms of the upcoming stock moves and see how options can play a role in possible short-press situations.
Use Tilray, Inc. (NASDAQ: TLRY) as an example, we will also look at how spreads in a high premium environment can be used to reduce capital expenditures – regardless of your trading outlook.
Overview and expected movements
First, a comparison of Tilray’s expected movements over the next month, Canopy Growth Corporation (NASDAQ: CGC), Aurora Cannabis Inc. (NYSE: ACB), Aphria Inc. (NASDAQ: APHA) and Cronos Group Inc. (NASDAQ: CRON) via the Options AI Calculator
With Tilray (TLRY) trading around $ 55, the options market is pricing an expected move for the month of more than 60% in any direction. (note – the company will report earnings in the first week of March). The move priced in options equates to about $ 90 for a bearish consensus and $ 20 bearish:
Short press and save
At the time of writing, the highest near-obsolete option strike is 65. As the stock moves higher, higher strikes are likely to be added (in fact, strikes are added to 100 today), but there is often a delay in the short gamma needs to be restored. The term “gamma squeeze” has been used frequently over the past few weeks, especially with respect to the share in meme. In very simple terms, it relates to the options market makers who sustain the upward momentum of a price movement by having to buy underlying stocks to hedge their short option exposure. It therefore follows that when the ceiling is hit in terms of options, this gamma pressure can be reduced (at least temporarily).
In addition, without further strike outside the money calls available, buying direct calls to trade a positive view in a stock such as TLRY could involve high capital expenditures and mean high interruption fees.
Next, we will look at how option spreads can be used to reduce capital expenditures and possibly improve the probability of profits (as opposed to buying direct calls or selling).
Please note that any stock and / or trading strategies referred to are for informational and educational purposes only and should not be construed as recommendations. The strategies outlined represent only a few of the many possible ways in which options can be used to express a specific view.. At the time of writing, all prices are approx.
Call spreads versus direct calls at high premiums
Currently the TLRY 19 March 65 Call trades at around $ 20, risks $ 2,000 to buy 1 contract and implies a break-even point of around $ 85 in the underlying stock (at expiration).
Knowing that the options market is a move of price more than 60% until March, and that the 65 strike is currently the highest strike, we will now look at an example of a bullish TLRY 19 + 55 / -65 debit call distribution (buy a 55 call at the same time as you sell the 65 call). At the time of writing, it was trading around $ 3.00, with the risk of $ 300 to buy 1 call spread and a break-even point of approx. $ 58 in the underlying stock (at expiration).
If we use a call spread, we have lowered the break-even price and the premium at risk, in exchange for the possible upward constraint if the stock were to move much further than the upper strike.
Note the interruption in this strategy, just a few dollars higher than the current stock level, via options AI:
In addition, as one can see with the two strikes of the spread, this strategy trades below $ 3, while the 65 call is around $ 21.00:
It is important to note that the options market has an equally large expected move to the downside price. Indeed, with the same method, Debit rate spreads can be applied in a similar way to express a clumsy move. Options AI does not recommend trading TLRY shares and has no opinion on the future price movement of any stock.
Summary
Remember, the above are just examples of the many ways a trader can use a view by using options. It is based on the place where the shares are trading at the time of writing and is only intended to show how the expected move can help provide insight before you trade – especially in an uncertain event – and how it can be used for more. informed strike choice. Learn / Options AI has some free tools, including an earnings calendar with expected movements, as well as information on expected movements and spread trading. The concepts shown in Tilray can apply to any stock and are simply used here for illustration.
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