In early December there was an opportunity brewing in Aurora Cannabis (NYSE:ACB) stock between $2.40 and $2.60 per share. I know this sounds very granular and short-term, but therein lie dozens of such setups per year. Today we make the argument as to why ACB investors should care about the short-term.
It is easy to restate the woeful story of cannabis stocks this year. The Wall Street statistics are horrendous. Aurora stock, for example, is down 83% off its highs. And it’s not alone. Canopy Growth (NYSE:CGC) is also almost 70% off its highs. Year-to-date Aurora stock is down more than 60%.
Early fundamental investors that are in ACB stock for the long-term have definitely seen their investments get obliterated. It’s hard to say if it’s going to be better in the future as these stocks can’t yet find a bottom. And even when that happens, the 2018 hay-days may not ever come back.
But since the overall thesis for pot stocks is still viable, I can understand ACB fans wanting to stick it out or bust. Since the level of success from here is not likely to equal the peaks of 2018, by definition, investors who are stuck long from much higher levels need to manage their risk by trading around their positions. There are ways of doing this, but they all involve short-term trading ACB.
Aurora Stock Delivers Short-Term Opportunities
Aurora stock has been a very active trading vehicle. It has a low price ticker so it attracts all account sizes for trading. The intraday moves have been impressive in relative terms, so there are daily areas of opportunities for those who can trade fast.
However, Aurora investors are emotional about their stock so they tend to only want to trade it from one side. This is OK as long as they know where to place the stops if the price action goes against their short-term assumptions.
In this case the closest upside potential for ACB stock is if the bulls can get to $2.10 per share. Then they could invite buyers to fill the small gap above. More importantly, they would breakout of a descending lower-high trend line that has persisted for weeks. The fans of Aurora are itching to chase any good news in the charts. Conversely, if ACB cannot hold its recent lows, then it could retests the lows of June 2017.
There might be some good news soon. This terrible 2019 correction brought Aurora cannabis stock back to its levels from 2016. These in theory should provide some support because it has fallen back into a solid old base of consolidation. Those who traded it back then will want to trade it again.
A More Cautious Approach to Trading ACB Stock
It is important to note that trading a low-dollar stock like ACB gives the impression that the dollar risk is small. On the contrary, this is a fast-moving stock and in percentage terms it can cause just as much damage as higher-priced tickers. So just because it’s a $2 stock doesn’t mean traders can’t lose a lot of money.
There is a definite need to use specific stop losses. Ideally these are set at the start of a trade along with specific exit targets.
Options can also help minimize the risk from here. The alternative to buying the actual Aurora cannabis stock is to buy call options. This way investors can limit the potential damage by betting a set smaller amount and letting time be the factor. For example, instead of buying shares for $2, a trader could buy January 2021 $3 call for 45 cents per contract.
Each call option contract represents 100 shares of Aurora stock. However, time becomes the enemy when owning options because they lose value with time, especially if price stalls or goes the wrong way.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. Join his live chat room for free here.
