Canopy Growth Corporation (NYSE:CGC) might be a shell of its former self and worthy of the “dead money” label, but there is a way to inject profits into the lifeless corpse. You don’t have to be a doctor, and it’s not even that complicated. All it requires is a little bit of money and the willingness to embrace CGC stock options.
The High Has Gone Bye-Bye
The hype train for cannabis stocks was running full steam ahead from 2017 to 2019. But last summer reality set in and the locomotive quickly derailed. It’s been an unending train wreck ever since, and all of the big players in the industry, from Tilray (NASDAQ:TLRY) and Cronos Group (NASDAQ:CRON) to Canopy Growth, have seen their share prices return to their humble beginnings.
During the pot stock mania, CGC stock grew from a single-digit munchkin to a veritable marijuana giant. From the beginning of 2017 to its ultimate peak of $59.25, CGC exploded 769%. Along the way, bulls spun sweet-sounding narratives of widespread marijuana legalization and increased adoption by the masses.
Unfortunately, reality has seen more thorns than roses. True believers have been sorely tested as their paper profits have dissipated alongside the share price. CGC’s most recent earnings weren’t stellar.
It is against this backdrop that we must assess Canopy’s current price chart.
CGC Stock Chart
The weekly downtrend leaves much to be desired. We’re submerged beneath the major moving averages and have yet to reverse the series of lower pivot highs and lows. For all its fury, the rebound off the March low still looks like a bear retracement. The upswing ended with a nasty-looking dark cloud cover candlestick right at the 200-week and 50-week moving averages.
Since then, four narrow-bodied, indecisive candles have cropped up, signaling a short-term stalemate between bulls and bears.
On the daily view, the 200-day moving average is bearing down on the stock, bringing resistance with it. At the same time, the 20-day and 50-day moving averages are flattening out in response to a weakening of what could have become a nice uptrend. Everything was lining up quite bullish until the late-May earnings report arrived to spoil the party. Since then, as reflected by the quartet of weekly dojis, we’ve seen neutrality, a sideways shimmy revealing indecision.
The long-term downtrend suggests bears will likely be the eventual victor. But until we push decisively below $16, buyers have a chance.
Buying CGC stock outright seems too risky, though. I’d at least couple your equity purchase with a short call trade. Together, this forms a covered call and is the secret to squeezing profits out of the stock even if it remains dead.
Canopy Covered Calls
When you sell a call against stock, you are getting paid a premium for the obligation to sell your shares at a set price. That premium is your cash flow and can be used to generate some income as well as offset minor losses in the stock. In that sense, it provides a small amount of downside protection.
The Trade: Buy 100 shares of CGC and sell the August $17.50 call option for $1.60.
If you purchased the stock for $16.60, then the overall cost basis would be $15 (after accounting for the call premium received). If the stock continues trending sideways until expiration, then the call will expire worthless, and you’ll pocket the $1.60. That works out to an 11% return, or 22% if you’re buying the stock on margin.
But it gets better.
If CGC rises past $17.50, you also grab another 90 cents from the price increase in the stock. Thus, your max profit is $2.50, which translates into a 17% return, or 34% on margin.
By covered call standards, that’s a really high rate of return.
For a free trial to the best trading community on the planet and Tyler’s current home, click here! As of this writing, Tyler held neutral options positions in XOM.