163% Profit Opportunity On Canopy’s First Earnings Since Canadian Legalization

Forget everything you know about cannabis. Dismiss all pop culture references to smoking pot and getting stoned. Now, disengage from the notion of even investing in a hot industry just because it seems like one that will “do well.”

For a select few companies, cannabis is a true business… and industry that wants to prove its sustainability, breadth of potential markets and longevity. And only one company, right now, that is taking a clear leadership role.

From its first foray onto the front pages of the Wall Street Journal and the New York Times, Canopy Growth Corp. (CGC) has been fighting to show itself as the Coca-Cola of cannabis. A better analogy, at least in terms of how it’s operated since its major investment from Constellation Brands, would be the Standard Oil of cannabis.

You see, it certainly has plenty of competition… just like the thousands upon thousands of local oil drillers and transport companies at the turn of the 20th Century. But it truly controls the market right now.

Earlier this year, the company announced its own $100-$150 million investment in a hemp production facility in New York. It also announced it received a license to process and produce the plant. That follows the late December passage of the Farm Act that legalized the growing of industrial hemp plants. These specific types of cannabis plants are the ones the produce CBD, the smaller, but still very lucrative little sister to THC.

Think about that. In less than a month, just 25 days after the passage of federally legal CBD production in the U.S., Canopy both received permission and set up plans to begin producing it. That quick turnaround is only possible when three things are present: 1.) an operational plan set to act strategically, 2.) a team of legal paper pushers who know how to gain the necessary permissions quicker than its competition and 3.) the capital to get it done fast.

Just today, Founder and Co-CEO Bruce Linton went on CNBC to say that he believes this U.S. market represents a potential opportunity worth tens of billions of dollars. The company’s current market cap is only $17.3 billion… and CBD is only a fraction of what the company does.

This company has rightfully been on a tear of late. Most cannabis companies have been… at least to start the new year. But Canopy’s is deserved:


As you can see, it has nearly reached its autumn crash that took down the whole industry. This time, however, Canopy’s position is on safer ground.

As the industry leader in a volatile market, it will continue to experience these kinds of high peaks and deep troughs. But the next wave should leave the company higher than competition.

First of all, many of the speculators that got played the last time they dabbled in cannabis have washed away. With so many new players — 30 current cannabis companies already filed with the SEC or CSA for IPOs — the gamblers left will have other options to place their bets. Canopy, on the other hand, is graduating to mature status in this sector.

And while investing in a stock that has just about doubled in a month might not sound appealing, there is good reason to be bullish on Canopy even in the short term.

The company will announce its third-quarter numbers in two weeks (its fiscal year ends on March 31). This is a big one. This will be the first quarter with real results from its massive Canadian operations post-legalization. All preliminary results from distributors and regulators show even more demand than expected.

Canopy, right from the start of that legalization going into effect, has had 4.3 million square feet in licensed, commercial-scale production facilities, with another 1.3 million square feet of expansion in progress… And that’s just its Canadian operations.

This quarter is going to show just what it’s like to be a world leader in a high-demand industry with both the political and economic stars aligning for one great quarter. This should give Canopy another boost, to likely new all-time high share prices.

Fortunately, there’s a way to play this without taking the long view. Instead, traders are able to profit from just this excellent quarter, without putting much money at risk at all.

A Trade For Short Term Canopy Bulls

A bull call spread is a trade we like to use around here when we think a stock is going to rise in the short term. The idea is to buy a call option on that stock, then sell a second call option with higher strike prices. This does two things.

First, it does cap the maximum potential return. Meaning if that stock rises significantly higher than expected, the bull call spread trader won’t see all of it… just up to a certain amount.

However, he or she makes that exchange for a small and limited upfront and total risk. The amount to enter this trade is all that the trader would have to lose. And that amount is much smaller than placing a bet in any other way.


Source: The Options Industry Council

Let’s look at a specific example.

A Specific Trade On CGC’s 3rd Quarter

The company announces its earnings on February 14. And shares of Canopy currently trade for about $49.50. So, starting with February 15 $50 calls makes the most sense here.

To enter a bull call spread on CGC, a trader could buy a February 15 $50 call for $3 per share and sell a February $51 call for $2.62 per share for a cost of $0.38 per share. Since each contract is worth 100 shares, that’s a net debit of $38 to open this trade.

That’s it… that’s all it costs to get in and the total amount the trader would have to lose if shares don’t rise with this earnings announcement.

The profit potential is found by taking the difference in strike prices ($51 – $50 = $1) and subtracting the entry cost ($1 – $0.38 = $0.62). On 100 shares, that’s a maximum profit potential of $62.

That represents a return of 163% on the amount of risk in just two weeks’ time. To lock in that full 163%, shares of CGC would have to rise to $51 by February 15, the first day of trading after its earnings announcement. That’s a move of just 3% from today’s price.

You’ve likely seen how fast a stock can move on a good earnings announcement. Think how much this one can as the industry leader in its first quarter post-Canadian legalization.

— The Option Specialist

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About the Author: The Option Specialist