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CGC Risk Reversal Trade Breakdown

Canopy Growth (CGC) is reporting earnings on May 28th, and Options traders are currently pricing in around a $2 expected move by that expiration cycle date. The general consensus EPS is around -.18$ as of Friday when the stock traded up around 3.5%. Expected quarterly earnings are currently around 85% with quarterly revenue expected at approx. 58%.

Obviously not very appealing at all for a bullish earnings play, but the large fade ever since February of this year cannot be ignored. With the large discounts the past week has brought, along with much needed spike in volatility, we are currently looking to take advantage of this IV and the speculation into earnings.


CGC is currently trading at the $22.95 level after bouncing off the $21.71 mark on the 13th, the stock is trying to gather some steam in hopes of triggering those playing the RSI to push this stock higher back out of oversold territory. The next resistances weighing down on this underlying will be the $24.40 level and the 200 SMA (shown below as yellow line).

Daily Chart of CGC, Courtesy of TC200

Set Up

The risk reversal trade strategy will allow us to participate in an underlying run into earnings with no risk to the upside. CGC is also cheap enough where we feel like we do not need to chase the stock, nor do we want to purchase shares here, but we are fine getting assigned for around $3 cheaper.

We are selling the 20 Strike Puts at around 24 delta, and purchasing the 30 strike Calls with 17 delta in June 18th for a total credit of around $0.42. Our max loss would be getting assigned those 100 shares at $20 minus the credit of $.42 we received at opening. The max profit is undefined as there is no risk to the upside, and the higher the CGC can run before expiration, the higher our return. Our Total delta on this trade would be around 41, with a probability of profit at 70%.

This is a great strategy for those who do not mind owning one of the hottest Cannabis stocks of the past couple years at a cheaper price as a max risk, with a Bullish directional bias into earnings.

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