Shares of cannabis company Cronos Group (NASDAQ:CRON) have been on an absolute moonshot over the past two weeks. CRON stock has risen 113% in the past nine trading days since reporting earnings, or lack thereof, on Aug. 14.
The market cap for Cronos is now over $2 billion for a company that generated $3.4 million in revenues last quarter. Pricey is an understatement. Look for reality to set in and CRON to pullback over the coming weeks.
The major impetus behind the red-hot rally was news that Constellation Brands (NYSE:STZ) had taken a 4 billion dollar stake in fellow cannabis competitor Canopy Growth (NYSE:CGC). This news sent CGC and other marijuana stocks, including CRON, soaring. The latest rumors of Diageo (NYSE:DEO) looking to enter the space only served to add fuel to the fire.
So while Canopy Growth has an actual deal on the table, CRON stock is trading like a deal is already done for them as well. CRON has traded stride for stride with CGC as the comparison chart shows. If no deal is announced for Cronos, look for shares to retrace much of the recent gains.
To say that CRON stock is getting overbought in an understatement. Its 9-day-RSI just breached the 90 level for just the second time ever. The first instance marked a significant short-term top in the stock.
Its MACD is at the highest readings ever, another sign of euphoria. Yesterday’s price action, with CRON stock reversing after trading up to new all-time highs at $12.89, is further indication that the buyers may be getting exhausted. This type of parabolic price action never seems to end well.
Implied volatility in CRON options is at extremes as well, trading at the 100th percentile. This means option prices have never been more expensive, favoring incorporating option selling when structuring trades. So to position for a pullback in CRON stock, a put diagonal spread is an effective way to take a bearish stance with defined risk.
CRON Stock Trade Idea
Buy the CRON Oct $12.50 put and the sell CRON Sep $10 put for a $2.00 net debit
Maximum risk on the trade is $200-per-spread. Ideally, CRON stock closes near $10 on September expiration to realize the maximum potential gain. The spread is 16 deltas net short at inception, which equates to being short 16 shares of CRON stock.
Tim may hold some of the aforementioned securities in one or more of his newsletters. Anyone interested in finding out more about Tim and his option-based strategies can go to https://marketfy.com/item/options-and-volatility.