Here’s what the $1.2 trillion insurance industry can teach you about profiting from short-term moves in cannabis stocks…
When I first started researching cannabis stocks, the entire cannabis industry was comprised of only a handful of penny stocks.
Canopy Growth Corp. (NYSE: CGC) was the first company I came across, and with it came a whole new world of opportunity.
Cannabis companies have come a long way since then. Canopy made itself into a $16 billion company, and the entire industry just entered its second phase of growth, the highest growth phase the cannabis industry will experience.
The fortunes made in the first phase were impressive. But, the wealth created as $20 billion in legal marijuana sales quickly ramp into revenues almost eight times bigger will dwarf the fortunes built to date.
That’s because, while it took nearly a decade to get from no legal marijuana sales to $20 billion, sales will be well over $100 billion in probably half the time.
And, as we move through this second phase of growth, a bidding war for cannabis stocks will develop when institutional investors scramble to get that kind of growth – once they get cleared to move.
Now, it’s important to understand one thing. These wealth-building returns won’t happen overnight. Investors will need a longer-term perspective to reap them. They will measure those gains over months, quarters, and years.
Options Work like Insurance Contracts
Because of how far the cannabis industry has come, it’s now possible to trade options on cannabis stocks.
And options give investors a way to take very specific views on cannabis stocks, including exactly how much they think stock prices will rise or fall, and how long it will take for that to happen.
To develop an understanding of how options work, it helps to consider how an insurance company makes money.
Take auto insurance, for example. When you take out insurance on your car, you pay the insurance company a premium. In exchange, the insurance company promises to pay for repairs to the car in the event you get in an accident.
Don’t get in an accident, and the insurance company keeps your premium. Get in an accident, and the insurance company pays you to repair or replace the car.
And keep in mind that the premium paid to secure the insurance payout pales in comparison to the possible insurance company payout.
Options work the same way, except with stock prices.
Targeting Specific Price Movement
With options, you can place a trade that pays you when the stock price of Canopy Growth rises above $40. The higher it rises above that price, the more you get paid.
But someone else has the other side of that same trade. When the stock goes above $40, the other party pays you what you’re owed. Now, they don’t accept that risk for free. They want some money upfront to offset their risk.
That upfront payment obligates them to pay you when the stock price rises above the target. And that is how an insurance contract works.
Cannabis IPOs are shattering records every few months. May of 2018, $1.5 billion for new investors… July of 2018, $2 billion… then just a few weeks ago, $4.5 billion. So if you’re ready to take a stab at this kind of profit potential, we’ve got the details right here.
With the option contract described above, you buy “insurance” that pays you when a certain event happens. In this case, instead of a car accident, the price of Canopy Growth going above $40 represents the event. The person on the other side of the trade acts as the insurance company. They collect a premium, and provided the stock doesn’t rise above $40, they keep the entire premium.
So, as you can see, with options you can make money from a rising stock price while only risking the money you pay as the premium. And you only pay the premium once, upfront. So, you will never lose more than the initial premium you paid.
That’s why, with options, you have unlimited upside and your downside is limited if you structure things the right way.
And, like insurance, the premium you pay is small compared to the gains. That way, it doesn’t take a lot of money to put yourself in a position to make big profits.
You can also put a short limit on the time that it takes for Canopy’s stock price to go above $40. Think of it as the difference between term life insurance and whole life. The shorter the time limit, the lower the premium you have to pay.
That means, for short-term options, the payouts can be enormous relative to the premium when the stock moves past the price target you set.
And these short-term payouts can be a perfect complement to your longer-term cannabis plays, especially with the growing list of cannabis stocks that now offer options.
Growing List of Cannabis Options
In addition to Canopy Growth, Aurora Cannabis Inc. (NYSE: ACB), Innovative Industrial Properties Inc. (NYSE: IIPR), and a handful of other cannabis stocks now trade on the New York Stock Exchange (NYSE). Nearly twice as many more trade on the Nasdaq. Listing on these major exchanges attracts more trading into those stocks.
And more trading makes it possible for options markets to build option contracts – and for market makers to provide the liquidity needed for investors to trade.
Now, opening an options account takes a bit more time than a traditional stock account. You still need a broker, but you want one with the right platform to trade options. You also have to qualify for different levels of option trading. There are typically four levels. The more complicated the strategy, the higher the level.
But don’t get overwhelmed. Anyone is free to add short-term profits to their long-term cannabis portfolio.
And we can help you every step of the way – including exactly which option trades to make.
We call it Cannabis Power Trader, and my friend, and NICI Advisory Board Member, Tom Gentile, takes his decades of experience profiting from options trading and applies it to cannabis investing. His recommendations are very short-term plays, but the upside has proven enormous.
It also doesn’t require a lot of money to put on a trade. So you won’t cut into any funds you have set aside to make those longer-term cannabis investments upon which you can build generational levels of wealth.
Since we just talked about investing in cannabis stocks for the short term, I also want to share a certain sector of the industry for those wanting a longer view: Biotechnology.
If you haven’t done so, you should check out the free premium report on my team just put together describing the “Entourage Effect.” You’ve likely heard of cannabinoids like THC and CBD, and you may have heard of terpenes, but they work much more powerfully together than alone, and this new guide lays out exactly how they work together.
When you understand the power behind the plant, you’ll see where the next wave of profits will start flooding in for cannabis investors.
Executive Director, National Institute for Cannabis Investors
14 responses to “Book Cannabis Stock Gains No Matter How They Move”
August 08 2019