How to Trade Tilray Without Getting Smoked

The trading in cannabis stock Tilray Inc (NASDAQ:TLRY) lately has not been for the faint of heart. On Wednesday, Sept. 19, shares of the semi-recent Canadian import were halted multiple times for volatility, as TLRY's intraday gain ballooned well beyond even its usual outsized norm. Tilray stock opened at $233.58, hit a high of exactly $300, and tagged a low of $151.40, all before settling at $214.06 -- netting out to a gain of 38.12% on 31.72 million share volume.

To put Wednesday's action in perspective, TLRY's average daily share volume over the past month has been 13.85 million -- and the stock's mean daily price over the past 21 trading days, believe it or not, has been a modest $82.56. Tilray shares have advanced (on a close-to-close basis) on 14 of those days, and declined on the remaining seven. The stock's average daily percentage move over the past 21 sessions stands just shy of 13%, regardless of direction.

TLRY's 30-day historical volatility (HV) arrived this morning at a new high of 188.3%, and speculative traders are pricing in expectations for more of the same in the immediate days and weeks ahead. As of last night's close, 30-day at-the-money implied volatility (IV) for the stock arrived at a fresh peak of 289.6%.

How Not to Trade Tilray

Even if you're an options trader who's interested in the upside for cannabis stocks as legalization gains traction across the U.S. and Canada, you might not necessarily be drawn to the gut-churning day-to-day action in TLRY shares. Based on the massive share price moves this stock sees on a daily basis, it seems like any type of holding period longer than a day is dicey -- but if you don't get that day's directional move right, you could quickly take a 100% loss on your put or call.

A long straddle or strangle would allow you to play a high-volatility move in either direction without picking a directional bias, which might seem ideal for a stock with Tilray's track record on the charts. But with IVs pumped up to such lofty levels, buying double premium right now can make it extremely difficult to break even on a straddle, let alone profit.

For example, as of this writing, the TLRY September 230-strike straddle is closest to being at-the-money -- and with front-month expiration tomorrow, it's nearly all time value. Assuming you could buy both options at the mark, you'd pay a premium of $59.20 (for a total cash outlay of $5,920, given 100 shares per contract).

That means your breakeven at tomorrow's close lies at $289.20 on the upside and $170.80 on the downside. Such massive moves aren't outside the realm of possibility for Tilray, as we've seen very recently.* However, $5,920 is a fairly substantial risk to take on in hopes that the stock's volatile swings will work in your favor by the time you can frantically sell to close -- and the odds of the potential reward approaching anywhere near that level are vanishingly slim.

But selling premium can be painful for Tilray traders, too. Per our partners over at Trade-Alert, there was some "very painful covering" of sold 190-strike calls on Tuesday in the face of the stock's latest surge. And "one would think that playing an iron condor or a put credit spread may make sense, but I look at the spreads and they are just too wide and too illiquid," says Schaeffer's Senior Options Strategist Tony Venosa, CMT.

You Don't Have to Trade TLRY Directly

This might seem obvious, but it's worth pointing out amid all the Tilray hype that's dominated cannabis sector headlines this week. "You could play TLRY and other pot stocks through the MJ exchange-traded fund (ETF)," notes Venosa.

The ETFMG Alternative Harvest ETF (MJ) offers the same basic appeal as so many other sector-based equity ETFs -- sector-specific exposure, but with a somewhat mitigated risk profile relative to investing in a single stock within that sector. For example, MJ counts among its top holdings TLRY, but also considerably less volatile names like Cronos Group (CRON) and Canopy Growth (CGC). And with MJ lately attracting increased daily option volume and inflows, traders with an interest in the ETF may find themselves in good company.

Or You Can Take Advantage of TLRY IV Bloat

For those who aren't necessarily looking for a stable cannabis sector investment -- but who are open to capitalizing on the wild trading action in Tilray -- Schaeffer's Quantitative Analyst Chris Prybal sees opportunity in the stock's inflated IVs. Experienced options traders with a healthy risk appetite may want to consider his short straddle idea.

"You could sell to open the January 2021 230-strike straddle, with the call being written for $66 and the put for $184.30, bringing the total premium of the straddle sold to $250.30," explains Prybal. "With TLRY around $230, you have more than intrinsic value to play with. If it goes bankrupt, you would still be profitable. Your risk would be TLRY fetching more than $250.30 + 230 = $480.30."

However you decide to play Tilray stock (or not), we'll take this opportunity to link you to our guidelines on best practices for money management. Stay safe out there, speculators.

*Editor's note: In fact, by the time this article was published, TLRY had dropped from the $230 range all the way down to $177.51. At press time, its intraday range for the session is $244.00-$170.61.