Unusually Large Aurora Cannabis And Tilray Option Trades Following Post-Election Rally

Cannabis stocks have been on fire since Election day, and two of the hottest cannabis stocks have been Aurora Cannabis Inc ACB and Tilray Inc TLRY.

The huge moves in Tilray and Aurora over the past two days triggered some unusually large option trade on Friday as traders make massive bets on where cannabis stocks are headed next.

Related Link: Cannabis Stocks Rebound As Dust Settles Following US Election

The Trades: On Friday, Benzinga Pro subscribers received dozens of option alerts related to unusually large trades of Tilray and Aurora options. Here are a handful of the biggest Tilray trades:

• At 10:56 a.m., a trader sold 1,500 Tilray call options with an $11 strike price expiring on Nov. 20 at the bid price of $1.90. The trade represented a $285,000 bearish bet.
• At 11:03 a.m., a trader bought 1,160 Tilray put options with a $10 strike price expiring on Dec. 18 near the ask price at $2.459. The trade represented a $289,420 bearish bet.
• At 11:31 a.m., a trader bought 887 Tilray put options with an $11 strike price expiring on Nov. 13 at the ask price of $2.201. The trade represented a $195,228 bearish bet.

Here are a handful of the biggest Aurora option trades on Friday:

• At 9:33 a.m., a trader bought 1,090 Aurora call options with a $7 strike price expiring on Friday near the ask price at $2. The trade represented a $218,000 bullish bearish bet.
• At 11:28 a.m., a trader bought 2,071 Aurora call options with a $10 strike price expiring on Friday at the ask price of 84 cents. The trade represented a $173,964 bullish bet.
• At 11:38 a.m., a trader bought 677 Aurora call options with a $6 strike price expiring on Nov. 20 near the ask price at $4.594. The trade represented a $311,013 bullish bet.

The three largest Tilray option trades of the morning were all bearish, while the three largest Aurora trades were bullish. Two of the three largest Aurora option trades involved contracts expiring on Friday, suggesting they were day trades rather than medium or longer-term bets on where Aurora’s share price is headed next.

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 small sizes of the largest Tilray and Aurora trades by institutional standards, they were likely not institutional hedges.

Bullish Election Results: It appears increasingly likely that Democrat Joe Biden has won the election, which could be good news for cannabis stocks from a federal level. Regardless of the outcome of the presidential election, cannabis investors scored key legalization victories in five different states. New Jersey, South Dakota, Montana and Arizona all legalized recreational marijuana. South Dakota and Mississippi also legalized medicinal marijuana.

At this point, 31% of Americans live in states in which recreational cannabis use is legal. However, victories in so-called “red states” like South Dakota and Mississippi suggest the cannabis issue is becoming more bipartisan in nature.

Tilray and Aurora are both Canadian companies, but U.S. federal legalization could represent a massive long-term growth opportunity for both. The way the two stocks are rallying this week may represent a shift in the market’s belief about if and when full US federal marijuana legalization will happen.

At the same time, both Aurora and Tilray are extremely heavily shorted stocks, suggesting short covering could also be playing a role in this week’s trading action. As of late outstanding short positions for Aurora and Tilray represented 19.1% and 23.1% of the two stocks’ floats, according to S3 Partners.

Benzinga’s Take: It appears as of Friday morning, the largest option traders are more bullish on Aurora than Tilray. Traders will now wait and watch to see if the cannabis trade loses steam next week or whether the bullish momentum is just getting started.