Can Cannabis and Volatility Reveal the Best Stock for Options Traders?
With the legalization of cannabis in the US, there has been plenty of speculation on companies either growing or using these products. However, it remains a volatile and uncertain market for option traders.
It certainly isn’t a case of smoke without fire. There are nine states that have legalized marijuana for recreational use, and a further 29 that allow the medical use of cannabis – alongside Canada, which made using cannabis legal on October 17th.
This market has already seen a high level of volatility with Canopy Growth (CGC), Aurora Cannabis (ACB), Tilray (TLRY) and Cronos Group (CRON) all experiencing dips in value amidst reports of shortage of supply meaning demand won’t be met.
For those seeking value from cannabis stocks when options trading, the best strategy is to look at the mid-term ability of these companies to match the demand with supply and also at whether the medical-use products containing cannabis are ready for market.
It is likely to be in the new year before things become less hazy in cannabis stock options, but there are a few key metrics traders should watch in this sector. Key to growth will be earnings, sales and cost of production. Capitalizing on the cannabis market is going to be defined by timing: how soon can supply reach demand and how soon can that demand be accelerated by new products coming to market.
Exploiting market volatility is a key strategy
Tesla (TSLA) demonstrates this kind of market volatility, being in part being affected by the recreational side of the cannabis market.
At the moment, it is experiencing a high fluctuation in the market and, for experienced options traders, this might be a time for a more aggressive approach to trading Tesla shares.
The two factors that highlight this is price and direction. Since October 2017, the price has increased significantly. Combine this with the bad publicity from Elon Musk and the exit of many senior executives and you have a stock which has a degree of uncertainty and therefore subject to movement, especially during the last quarter of the year.
For many options traders, volatility is best left alone. But for others, market volatility and especially share volatility is a strategy to be embraced. For a trader accustomed to rapid movement in the market, it can open up a whole world of options.
Three key things to watch
There are three things to watch out for when trading on volatility; the news cycle, the direction of the stock option and whether to ‘call’ or ‘put’.
When deciding which direction the market is going on short-term or mid-term share options, the investor will be looking at the range of movement experienced, which direction it is currently heading in and how long it has been moving for.
Right now, the cannabis market is on a downer. For it to rise sharply again will depend on whether options traders can see an improvement in the supply-chain issues and whether the issues of production, research and development, and route to market have been addressed.
Identify these quickly and exploiting a volatile market with the right call can be a key strategy for successful options trading.
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