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CBD Could Deliver a Triple Digit Gain in This Large Cap Stock

CBD Could Deliver a Triple Digit Gain in This Large Cap Stock

CBD is one of the hottest trends in health and investing right now. According to a Harvard Medical School article,

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  • “CBD stands for cannabidiol. It is the second most prevalent of the active ingredients of cannabis (marijuana). While CBD is an essential component of medical marijuana, it is derived directly from the hemp plant, which is a cousin of the marijuana plant.

    While CBD is a component of marijuana (one of hundreds), by itself it does not cause a “high.” According to a report from the World Health Organization, “In humans, CBD exhibits no effects indicative of any abuse or dependence potential…. To date, there is no evidence of public health related problems associated with the use of pure CBD.”

    The article also explored potential health benefits of the compound:

    “CBD has been touted for a wide variety of health issues, but the strongest scientific evidence is for its effectiveness in treating some of the cruelest childhood epilepsy syndromes, such as Dravet syndrome and Lennox-Gastaut syndrome (LGS), which typically don’t respond to antiseizure medications.

    In numerous studies, CBD was able to reduce the number of seizures, and in some cases it was able to stop them altogether. Videos of the effects of CBD on these children and their seizures are readily available on the Internet for viewing, and they are quite striking.

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  • Recently the FDA approved the first ever cannabis-derived medicine for these conditions, Epidiolex, which contains CBD.

    CBD is commonly used to address anxiety, and for patients who suffer through the misery of insomnia, studies suggest that CBD may help with both falling asleep and staying asleep.

    CBD may offer an option for treating different types of chronic pain. A study from the European Journal of Pain showed, using an animal model, CBD applied on the skin could help lower pain and inflammation due to arthritis.

    Another study demonstrated the mechanism by which CBD inhibits inflammatory and neuropathic pain, two of the most difficult types of chronic pain to treat. More study in humans is needed in this area to substantiate the claims of CBD proponents about pain control.”

    Now, CBD could be more widely available. Yahoo reported,

    “Fluent Beverages, a Canadian joint venture between Tilray (NASDAQ: TLRY) and AB InBev (NYSE:BUD), has unveiled Everie, the company’s first non-alcoholic CBD-infused beverage.

    Everie is a 98 percent pure CBD-infused beverage with all-natural flavors. It is manufactured in partnership with High Park at its cannabis facility in London, Ontario, Fluent said in a statement.

    “We know that consumers are concerned about products that claim to be CBD-only, but which actually have significant THC content as well; specifically, with products coming from the unregulated market,” stated Becky Lindsey, chief marketing officer of Fluent. “Everie is made with CBD so pure that adult consumers can choose Everie with complete confidence – and no surprises.”

    Available in select Canadian provinces starting in December, Everie will be offered in ready-to-brew teas in a variety of custom blends that are specially grown on small estates. Whereas, the company plans to introduce Everie sparkling beverages in early 2020.

    Everie teas will be available in three gram biodegradable tea bags, featuring three flavorful blends: Lavender Chamomile, Vanilla Rooibos, and Peach Ginger Green. Meanwhile, Everie sparkling beverages will be available in a variety of fruit flavors, including Lemon-Lime, Mango-Passionfruit and Watermelon-Dragon Fruit.”

    The news comes as BUD nears resistance.

    BUD daily chart

     

    The longer-term chart using weekly data shows the resistance comes after the stock appears to have found support.

    BUD weekly chart

    A Trade for Short Term Bulls

    As with the ownership of any stock, buying BUD could require a significant amount of capital and exposes the investor to standard risks of owning a stock.

    To reduce the risks of a trade, an investor could purchase a call option. This allows them to benefit from upside moves in the stock while limiting risk to the amount paid for the options. However, buying a call option can also require a significant amount of capital and includes the risk of a 100% loss.

    Whenever an option is bought, the maximum risk is always equal to 100% of the amount of spent to purchase the option. Since options cost significantly less than a stock, the risk in dollar terms will usually be relatively small to own an option.

    To further limit the risks of the trade, an investor could use a bull call spread. This strategy consists of buying one call option and selling another at a higher strike price to help pay for the cost of buying the first call. The spread strategy always reduces the risk of an options trade.

    This strategy is designed to profit from a gain in the underlying stock’s price but has the benefit of avoiding the large up-front capital outlay and downside risk of outright stock ownership. The potential risks and rewards of this strategy are summarized in the chart below.

    bull call spread

    Source: The Options Industry Council

    Both the potential profit and loss for the bull call spread are limited. The maximum loss is equal to the net premium paid when the trade is opened. The maximum profit is limited to the difference between the strike prices, less the debit paid to put on the position.

    This strategy could be especially appealing with high priced stocks where the share price and options premiums are often a significant commitment of capital for smaller investors.

    A Specific Trade for BUD

    Every day, we scan the markets looking for trades with low risk and high potential rewards. These trades are available almost every day and we share them with you as we find them. Now, it’s important to remember these are trading opportunities in volatile stocks.

    When we find a potential opportunity, we evaluate it with real market data. But because the trades are volatile, the opportunities may differ by the time you read this. To help you evaluate the current opportunity, we show our math and explain the strategy.

    For BUD, the March 20 options allow a trader to gain exposure to the stock.

    A March 20 $85 call option can be bought for about $2.67 and the March 20 $90 call could be sold for about $1.17. This trade would cost $1.50 to open, or $150 since each contract covers 100 shares of stock.

    The amount paid to enter the trade is the largest possible loss on the trade. This is generally true whenever a trader is creating a debit to enter an options trade. “Creating a debit” means there is a cost to enter the trade. You could create a debit by simply buying puts or calls to open a directional trade.

    In this trade, the maximum loss would be equal to the amount spent to open the trade, or $150.

    The maximum gain on the trade is equal to the difference in exercise prices less the amount of the premium paid to open the trade.

    For this trade in BUD the maximum gain is $3.50 ($90 – $85= $5; $5 – $1.50 = $3.50). This represents $350 per contract since each contract covers 100 shares.

    Most brokers will require minimum trading capital equal to the risk on the trade, or $150 to open this trade.

    That is a potential gain of about 133% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.

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