How to Bet the Bottom Is In for Tilray Stock

Cannabis stocks exploded after the election saw multiple states legalize recreational marijuana. The positive turn of events brought much-needed buying interest into an industry that had seen share prices of the biggest players sinking like a stone. Even one of the group’s worst performers, Tilray (NASDAQ:TLRY), got in on the action. And Tilray stock doubled over three trading sessions.

Tilray (TLRY) logo on a web browser.
Source: Jarretera / Shutterstock.com

Though its share price has since returned to Earth, there’s a case to be made that its trend has turned, and a tradable bottom is in. The options market provides a beautiful trade for those willing to wager the recent gains hold, and TLRY stock remains aloft into the New Year.

Also, note that we’re not exactly talking about a mega-bullish play here. Betting that the gains hold means that TLRY stock needs to exhibit some neutrality over the next month. Its price ballooning would be nice, but it’s ultimately unnecessary to the trade’s success. One of the reasons for the more muted trade idea is Tilray stock’s relative weakness.

A Dwarf Among Giants

As great as the post-election pop was for Tilray, its follow-through has lagged behind those of both Cronos (NASDAQ:CRON) and Canopy Growth (NASDAQ:CGC). The latter two have gone on to exceed the highs reached in early-November. And if you’re a believer that strength begets strength and only wish to play industry leaders, I suggest passing on Tilray to focus your efforts on Cronos and Canopy.

Why? They both offer more developed uptrends that have persisted in the wake of the election. More directional bullish plays seem a better fit for the pair than with TLRY stock.

That said, if the recent excitement surrounding the marijuana industry persists, it should help keep Tilray from imploding. And that’s enough to make this trade idea work.

Now, let’s take a closer look at its price chart.

Tilray Stock Chart

Tilray (TLRY) weekly chart showing a nasty downtrend
Click to Enlarge
Source: The thinkorswim® platform from TD Ameritrade

The weekly view reveals just how relentless the unraveling has been since the 2018 hype train derailed. At one point, speculators and momentum maniacs jacked prices up to $300. Since then, we’ve seen nothing but bearish action. Given the larger time frame scale, it’s going to take a massive price rebound even to show up. For now, the few feints higher appear nothing more than blips on an overwhelmingly bearish radar.

To make any sense of the recent turnaround requires a magnifying glass. Moving to a six-month daily chart does the trick. Here you’ll find a handful of bullish developments.

Tilray (TLRY) daily chart with trend reversal
Click to Enlarge
Source: The thinkorswim® platform from TD Ameritrade

First, we’ve gone from being submerged beneath all major moving averages to flying above them. That’s a significant turnaround.

Second, the inevitable dip following the election-driven price surge was bought and created a higher pivot low. This kept dreams for the fledgling uptrend alive.

Third, accumulation days have returned, showing big buyers once again taking an interest.

With all of that in mind, Tilray stock finds itself two-days into a retracement. I would wait until we break above a prior day’s high before pulling the trigger on the options trade below.

Sell Tilray Stock Puts for Cash Flow

Rather than betting prices will continue their resurrection, I prefer a higher probability play that wins if TLRY stock simply doesn’t fall back too far.

The Trade: Sell the Jan. $5.50 puts for around 28 cents.

By shorting the put, we’re hoping the stock sits above $5.50 at expiration. If it does, we will pocket the $28 profit per contract. It may not sound like much, but the trade cost is approximately $56. That means this works out to a potential 50% return on the initial investment, which is fantastic by naked put standards.

On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article.

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Article printed from InvestorPlace Media, https://investorplace.com/2020/12/how-to-bet-the-bottom-is-in-for-tilray-stock/.

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