Long-Term Option Trade Idea On Tilray Stock Offers 62% Potential Return


When it comes to the best cannabis stocks, the two names that spring to mind for most investors would be Tilray (TLRY) and Canopy Growth (CGC).


When checking the IBD Ratings we can see that Tilray stock has a Composite Rating of 83, an EPS Rating of 59 and an Relative Strength Rating of 98.

Canopy growth stock has a Composite Rating of 51, an EPS Rating of 5 and a Relative Strength Rating of 85.

Based on these ratings, it seems that Tilray stock might be the best bet for a bullish option play.

Most option traders tend to think short-term, with trades typically lasting no more than 30 days.

However, there can be a time and a place for trading longer-term options, like an example discussed for Tesla (TSLA) last month.

Today, we’ll look at a similar example of a long-term cash secured put on Tilray stock.

As a reminder, a cash-secured put involves selling an at-the-money or out-of-the-money put option and simultaneously setting aside enough cash to buy the stock.

Scenarios For The Put Option

The goal is to either have the put expire worthless and keep the premium, or to take assignment and acquire the stock below the current price.

Implied volatility is high in Tilray stock at 71% (although not as high as the 120% seen in February), which means option premiums are high.

If we go out to the January 2022 expiration, the 20 strike put is trading for around $7.70.

A trader selling this put would receive $770 in premium, with total risk of $1,230 (calculated by taking the strike price times 100, less the premium received).

If Tilray stock is above 20 in January of next year, the put expires worthless and the trader achieves a 62.60% return on capital.

If the stock is below 20, the put will be assigned and the trader will be forced to buy 100 shares at 20.

However, with the premium received, the net cost basis for the position would be 12.30.

Best-Case: A 62.6% Return

So, under the best-case scenario, the trader makes a 62.60% return. In the worst case, the trader buys Tilray stock 48% lower than it is trading today.

I have no idea where Tilray stock will be trading in January next year, but this is one of my favorite trades on stocks that I want to own long-term.

It’s important to remember that options are risky and investors can lose 100% of their investment.

This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.

Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ


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