Cronos Group (NASDAQ:CRON) has certainly been lighting up lately. In fact, CRON stock is now up 125% since the beginning of the year. No doubt the cannabis industry is still in growth mode. In the case of the CRON stock price, however, it has grown too far, too fast.
It’s time for the rally to chill out.
InvestorPlace contributor Nicolas Chahine lays out a compelling long-term bullish thesis for Cronos Group stock in his most recent article on the popular marijuana stock. He brings up a very pertinent point regarding momentum stocks and extremes. Certainly, the stock is looking a little extreme from a valuation perspective. Cronos Group stock now sports a market cap over $4 billion for the first time ever. Revenues for last quarter were slightly less than $4 million. That puts the price-to-sales ratio at an astounding 1000.
CRON is also looking a little extended on the charts, to say the least. Its 9-day RSI is now over 90 for just the third time since Cronos came public. The previous two times CRON stock reached such extreme readings marked significant short-term tops in the stock. Shares are also trading at a massive premium to the 20-day moving average, another sign that the euphoria may be about to ease. The 14-day Detrended Price Oscillator is also flashing red as it approaches the most overbought levels ever as it nears 10.
Yesterday saw a key reversal in Cronos Group stock. Shares traded up to over $25 intra-day before dropping sharply to close at $23.25. This type of price action is often indicative of a short-term top as the buyers have finally become exhausted.
Shorting CRON stock outright is certainly risky. It is also almost impossible to do since CRON stock is “hard to borrow”, meaning you probably couldn’t short the shares even if you wanted to do so. The options market, however, provides a defined risk alternative.
How to Trade CRON Stock Today
Buy CRON April $35 calls and sell CRON April $33 calls for a 30 cents net credit.
Maximum gain on the trade is $30 per spread with a maximum risk of $170 per spread. Return on risk is 17.65%, which equates to a 127% annualized return. The short $33 strike price provides a solid 40% upside cushion to the current CRON stock price of $22.
Tim Biggam may hold some of the aforementioned securities in one or more of his newsletters. Anyone interested in finding out more about Tim and his strategies can go to https://marketfy.com/item/options-and-volatility.
