Following a major breakthrough, cannabis operators such as Canopy Growth (NASDAQ:CGC) saw their shares rise dramatically yesterday. As InvestorPlace’s Shrey Dua reported, President Joe Biden’s administration is moving to reschedule marijuana as a Schedule III substance. At the moment, cannabis carries the tougher Schedule I classification. With the decision potentially opening doors, CGC stock call options look mighty tempting.
Fundamentally, the Schedule III downgrade would put marijuana on the same legal level as Tylenol with codeine and certain kinds of steroids. On the other hand, a Schedule I classification put cannabis in the same narcotics group as LSD and heroin.
On the business front, Dua notes that “[t]he rescheduling would also remove many of the taxes that cannabis companies face in the U.S. currently, a major barrier to growers operating in the country.” It’s important to note that the news won’t impact the cannabis plant’s legalization in the U.S. Still, it’s an encouraging first step for cannabis activists.
While full legalization represents a tricky matter – in particular due to international treaty obligations – the latest development lends significant credibility to the underlying retail industry. As such, CGC stock may require a rethink.
Strong Winds Should Continue Brewing
One of the notable technical catalysts for CGC stock is the robustness of Tuesday’s swing higher. Yes, in one day, shares gained nearly 79%. However, it’s the almost full-bodied candlestick that’s noticeable. Visually, there is hardly any length to the “wicks” on the top and bottom of the candlestick.
Translation? As soon as CGC stock opened the session on Tuesday, the bulls took shares higher. And the closing price of $14.88 was just a smidgeon off from the intra-day high of $14.92. That’s encouraging if you’re going to bet on the argument that strength will beget even more strength. There was hardly any pause to look down from the perch.
Another factor that should further fuel bullish sentiment for CGC stock is that Canopy’s moderate sell rating will likely change. Now, management’s decision to create a U.S.-focused entity called Canopy USA doesn’t seem so reckless. If (or when) analysts start changing their perspectives, that could send CGC toward higher thresholds.
Trade of the Day: Buy $16 CGC Stock Call Options
For the trade of the day, bullish speculators may consider the 24 May 2024 $16 call option. It’s out the money (OTM) so there’s a risk that the derivative will end up worthless. Also, traders would only have a bit more than three weeks for CGC stock to make good on the transaction.
However, I have reasonable confidence that CGC stock will reach this point and possibly beyond. First, following Tuesday’s robust trading, the afterhours session saw the price move up almost 6% to $15.76. So, that Canopy shares will hit $15 is practically a foregone conclusion. With the $16 level just on the cusp, the bulls will likely make that drive up.
Second, CGC stock has a relatively elevated short interest of 12.19% of its float. As shares move higher, exposed bears will likely look to cover their positions. Doing so necessarily involves buying CGC in the open market, driving up the value even more.
This is a short-term consideration. However, the blue-sky potential is for CGC stock to reach $20, which is an incredibly satisfying round number. Thus, Canopy is one of the trades to watch today and for the next few months.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
