Back on May 8, I suggested getting long cannabis as a contrarian trade because sentiment had turned dark, and there was a potential catalyst on the horizon.
On May 16, the predicted catalyst hit (progress on rescheduling).
The two cannabis exchange traded funds (ETFs) I singled out May 8 advanced 14% to 24% (midpoint to midpoint) and 18% to 35% (midpoint to high). I suggested selling that strength, and selling covered calls into that strength.
Now, cannabis has sold off again, so that was a good trade.
At this point, sentiment has reverted enough towards the negative once more such that the group looks buyable again. While no one can ever “call the bottom” in the market or a group, including me, this looks like a good time to accumulate in stages again on weakness, judging by the year-to-date charts.
I’ve been suggesting a two-track approach to cannabis investing: Trading positions (to take advantage of the high volatility) and multiyear positions (to take advantage of the cultural momentum which makes cannabis reform inevitable).
I’ve been joking recently that while it’s not clear whether cannabis is entirely safe, we know for sure that cannabis investing causes bipolar disorder. The mood swings among cannabis investors are quick and dramatic. You can join in with the crowd and participate in the mood swings, a form of self-torture. Or you can step back and exploit them, selling the manic episodes of enthusiasm and stock strength, and buying the mood swings towards depression among cannabis investors.
I have been suggesting this tactic for months, and now it tells us to accumulate again, to take advantage of the depressive mood.
For simplicity, I suggest the AdvisorShares Pure U.S. Cannabis (MSOS) ETF, and the 2x leveraged version AdvisorShares MSOS 2X Daily (MSOX) as cannabis trading instruments. I cannot advise you on which one to use, or what mix, because that depends on personal qualities in you which I know nothing about: Your risk tolerance, age, number of dependents, overall wealth, overall stock exposure and so forth.
Also consider selling naked puts in these two instruments. I suggest July and August expiration puts at strikes a bit below current prices.
For example, consider selling the July or August $4 strike MSOX puts which currently sell for 55 and 75 cents a contract. This means you take in $55 and $75 per contract sold. If MSOX closes above $4, you keep the money.
Your risk is that cannabis plummets, and the naked put sales force you to buy MSOX at above-market prices. Your break-evens in these sales would be $3.45 and $3.25. MSOX would have to fall below those levels and stay there to lose money. That is possible, so be careful with position size.
For potentially superior and more targeted gains, consider positions as well in our portfolio names. Portfolio names are: Ayr Wellness (AYRWF), Cresco Labs (CRLBF), Curaleaf (CURLF), Cronos (CRON), the aforementioned AdvisorShares Pure U.S. Cannabis (MSOS) and AdvisorShares MSOS 2X Daily (MSOX), ETFMG Alternative Harvest (MJ), Green Thumb (GTBIF), Organigram (OGI), Tilray Brands (TLRY), Trulieve (TCNNF) and Verano (VRNOF).
In a volatile sector like this, I prefer to add on weakness rather than strength. While it could be some time before we see meaningful progress on rescheduling (there’s now a 60-day comment period), other potential catalysts are on the horizon. They include progress on SAFER banking in Congress, or the issuance of a new “Cole memorandum” in which the Department of Justice clarifies it will not prosecute cannabis sales or use in states that have legalized it. Note that I cannot predict the timing of these potential catalysts, but they remain on the horizon.
Copyright © 2024. All rights reserved. Copying or electronic transmission of this information without permission is a violation of copyright law. For the protection of our subscribers, copyright violations will result in immediate termination of all subscriptions without refund. Disclosures: Cabot Wealth Network exists to serve you, our readers. We derive 100% of our revenue, or close to it, from selling subscriptions to our publications. Neither Cabot Wealth Network nor our employees are compensated in any way by the companies whose stocks we recommend or providers of associated financial services. Employees of Cabot Wealth Network may own some of the stocks recommended by our advisory services. Disclaimer: Sources of information are believed to be reliable but they are not guaranteed to be complete or error-free. Recommendations, opinions or suggestions are given with the understanding that subscribers acting on information assume all risks involved. Buy/Sell Recommendations: are made in regular issues, updates, or alerts by email and on the private subscriber website. Subscribers agree to adhere to all terms and conditions which can be found on CabotWealth.com and are subject to change. Violations will result in termination of all subscriptions without refund in addition to any civil and criminal penalties available under the law.
