Large Option Trader Betting On Canopy Growth Bounce Ahead Of Earnings

Shares of cannabis stock Canopy Growth Corp CGC traded higher by 3% on Wednesday but remain down 55% overall in the past year Canadian cannabis sales growth hasn’t lived up to expectations.

Canopy shares tanked more than 11% after the company reported a larger-than-expected loss and lighter-than-expected revenue last quarter. The silver lining for Canopy bulls is that at least one large option trader is making a bullish bet on the stock.

The Trade

On Wednesday morning, Benzinga Pro subscribers received an option alert related to an unusually large Canopy trade.

At 10:28 a.m., a trader bought 902 Canopy call options with a $25 strike price expiring on Nov. 15 near the ask price at 41.6 cents. The trade represented an $35,524 bullish bet.

Why It's Important

Even traders who stick exclusively to stocks often monitor option market activity closely for unusually large trades. Given the relative complexity of the options market, large options traders are typically considered to be more sophisticated than the average stock trader.

Many of these large options traders are wealthy individuals or institutions who may have unique information or theses related to the underlying stock.

Unfortunately, stock traders often use the options market to hedge against their larger stock positions, and there’s no surefire way to determine if an options trade is a standalone position or a hedge. In this case, given the relatively modest size of Wednesday’s Canopy option trade by institutional standards, it’s unlikely to be institutional hedging.

Pre-Earnings Run-Up?

Despite the big drop in the past six months, the strike price of the calls purchased on Wednesday suggests more than 19% upside given their break-even price is $25.42.

The only major news from Canopy this week is an announcement that its Spectrum Therapeutics division was granted a license for its U.K. facility to store and distribute cannabis-based medicinal products. The news is a positive step in Canopy’s international expansion efforts.

Earlier this month, Canopy announced a new 71% stake in BioSteel Sports Nutrition. Investors may see the potential $50 billion global sports nutrition market as a long-term growth opportunity for cannabis/CBD producers like Canopy.

Benzinga’s Take

The positive headlines related to U.K. expansion and the sports nutrition market are bullish for Canopy. However, given the calls purchased Wednesday expire in less than a month, they're almost certainly not in response to headlines.

Instead, the call buyer may be betting cannabis stocks will rally ahead of third-quarter earnings as investors shift their attention from a weak second half of 2019 to early 2020 guidance.

Canopy's stock traded around $21.83 per share at time of publication.

Do you agree with this take? Email feedback@benzinga.com with your thoughts.

Related Links:

How Every Major Cannabis Stock Has Performed Since Canadian Legalization

How To Read And Trade An Options Alert