From News to Trade
A jump in the stock price can point to news about the company. That news could explain why the stock moved in the short term. But, a more detailed analysis will be needed to determine how the news is likely to affect the company in the long run.
An example of that process can be seen in the stock of Cronos Group Inc. (Nasdaq: CRON). News snapped the stock out of a short term down trend.
The News Highlights Growth Potential
Cronos Group Inc., formerly known as PharmaCan Capital Corp., is a principal investment firm. The firm seeks to invest in companies either licensed, or actively seeking a license, to produce medical marijuana pursuant to Canada’s Marijuana for Medical Purposes Regulations.
The firm typically invests in companies based in Canada. The firm is primarily an equity investor, but may also advance debt as appropriate. It seeks to make minority investments with appropriate governance and shareholder rights.
The firm seeks board representation consistent with the size of the investment but does not need control.
According to reports, earlier this month, the company Cronos, announced a partnership with Ginkgo Bioworks. It will produce cultured cannabinoid, the active ingredient produced in cannabis plants.
At present, cannabinoids make up under 1% of the dry weight of the plant. So far, it hasn’t been possible to produce them commercially through traditional cultivation techniques. But that could change.
The two companies want to lower the cost of its production, create commercial scale and give the market the ability to access rare cannabinoids.
Ginkgo will develop eight target cannabinoids for production using yeast and through an industrial fermentation process. Operationally, it aims to produce a good yield at costs well below the industry norm, $1,000 USD per kilogram.
Cronos will own the right to use and to commercialize whatever intellectual property is involved. The total compensation to Ginkgo, if all eight target cannabinoids are met, is 14.67 million shares.
An analyst noted, “Ginkgo Bioworks has the expertise in organism design and development. In return for access to this technology, Ginkgo will get shares of Cronos when milestones are met.
Cronos could risk diluting shareholders through such deals. Yet, at a market capitalization of $1.8 billion, the company will scale its business and grow revenue if the partnership bears fruit. If Ginkgo does not meet various milestones, it will not get any share ownership reward from Cronos.”
That means this deal carries little downside risk for CRON and offers strong upside potential.
A Strong industry Could Propel CRON to More Gains
CRON has only been publicly traded since March of this year, offering little trading history. However, what history we do have for the stock is generally bullish as the weekly chart below shows.
The stock has enjoyed large gains based on the strength of its industry and then pulled back. From a technical perspective, a pull back can be healthy, allowing for time for the fundamentals to catch up with the stock price, in effect.
This recent news highlights how CRON can benefit from marijuana. The company is evaluating investment opportunities and there are many possible deals in the field. The company will pay for performance and will have little risk of failure.
This could be the ideal business model in a speculative industry.
Trading the Trend
When a stock is expected to move higher, traders could consider obtaining long exposure to the stock to profit. A number of options strategies could be used to meet this objective.
Among those strategies is a bull put spread that could be used. The risk and reward diagram is shown below and it offers limited risk with limited potential gains. However, it is well suited for a stock which is in an uptrend.
Source: The Options Industry Council
This strategy involves two put options. One put option is bought and a second put option with the same expiration date but with a higher exercise price is sold. Selling the put option will generate immediate income, just like the more familiar covered call strategy would. But, unlike a covered call, risk is limited.
Many traders will be familiar with the idea of a covered call. This is a conservative strategy many long-term investors use to generate income in stocks they own that are unlikely to make large moves.
Although the bull put spread is different than a covered call, the bull put spread strategy meets the same objective as the covered call which is to generate some income. This trade generates immediate income and carries limited risk.
A Specific Trade for CRON
For CRON, a bull put spread could be opened with the October 19 put options. This trade can be opened by selling the October 19 $11 put option for about $1.30 and buying the October 19 $9 put for about $0.50.
This trade would result in a credit of $0.80, or $80 per contract since each contract covers 100 shares. That amount is also the maximum potential gain of the trade.
The maximum possible risk is the difference between the exercise prices of the two options less the premium received. For this trade, the difference between exercise prices is $2 ($11 – $9). This is multiplied by 100 since each contract covers 100 shares.
Subtracting the premium from that difference means, in dollar terms, the total risk on the trade is then $120 ($200 – $80).
The potential gain is about 67% of the amount of capital risked. This trade will be for about one week and the annualized rate of return provides a significant gain.
The bull put spread is an example of how options are a versatile tool and could meet many of your trading objectives. In this trade, options provide income and defined risk that could be lower than owning the stock. This strategy also has a high probability of success.
These are the type of strategies that are explained and used in TradingTips.com’s Options Insider service. To learn more about how options can be used to meet your goals, click here for details on Options Insider.