Investors of Canopy Growth Corporation (CGC) have bid down the share prices ahead of the company's fiscal first quarter earnings report. At first glance, it appears that option traders are expecting a positive move, as the number of call options in the open interest is greater than the number of puts. The unusual option activity could create a strong upward trend in the price action if CGC reports a positive earnings surprise.

A sizable number of call options is growing in the open interest for CGC, and option premiums are unusually high right now. Trading volumes indicate that traders have been buying calls and selling puts in anticipation of a favorable earnings report. Unwinding these bets could result in unexpected downward pressure on the share price of CGC.

It is difficult to accurately predict the direction a stock will move following earnings. However, a comparison between the stock's option trading activity and price action shows that, if CGC delivers a negative report, the company's share price could fall significantly, moving further below its 20-day moving average after the announcement. This could happen because options are priced for a move upwards, but unexpected poor news could catch traders off guard and create a quick decline in share price.

Key Takeaways

  • Traders and investors have slightly bid down the Canopy Growth Corporation share price headed into the earnings announcement.
  • The share price has recently been closing below its 20-day moving average.
  • Call and put pricing is predicting a stronger move to the upside.
  • The volatility-based support and resistance levels allow for a strong move upwards.
  • This setup creates an opportunity for traders to profit from an unexpected earnings result.

By comparing the details of both stock price and option behavior, chart watchers can gain valuable insight, although it is imperative to understand the context in which this price behavior took place. The chart below illustrates the price action for the CGC share price as of Wednesday. This created the setup leading into the earnings announcement.

Earnings pricing for Canopy Growth Corporation (CGC)

Current Trends

The one-month trend of CGC stock has the share prices remaining near the bottom third of the volatility range, closing below the 20-day moving average in the week before earnings. Over the past month, the lowest CGC share price was around $18 in late July, and the highest share price was nearly $24 in mid-July. The price closed in the lower region depicted by the technical studies on this chart.

The studies are formed by 20-day Keltner Channel indicators. These depict price levels that represent a multiple of the Average True Range (ATR) for the stock. This array helps to highlight the way the price has risen above the 20-day moving average in the week before earnings. This price move from CGC shares implies that investors expect a negative earnings result.

Tip

The Average True Range (ATR) has become a standard tool for depicting historical volatility over time. The typical average length of time used in its calculation is 10 to 20 time periods, which includes two to four weeks of trading on a daily chart.

In this context where the price trend for CGC has fallen to a below average range, chart watchers can recognize that traders' and investors' confidence is declining going into earnings. That makes it important for chart watchers to determine whether the move is reflecting investors’ expectations for a favorable earnings or not.

Option trading details can provide additional context to help chart watchers form an opinion about investor sentiment. Recently, option traders are favoring calls over puts by a decent margin. This volume normally suggests that traders are expecting a positive earnings report; however, it's necessary to understand the context of this volume.

Tip

The Keltner Channel indicator displays a set of semi-parallel lines based on a 20-day simple moving average and an upper and lower line. Because the upper lines are drawn by adding a multiple of ATR to the average and the lower lines are drawn by subtracting a multiple of ATR from the average price, then this channel indicator makes for an excellent visualization tool when charting historical volatility.

Trading Activity

Option traders recognize that CGC shares are in a below average range and have priced their options as a bet that the stock will close within one of the two boxes depicted in the chart between today and Aug. 6, the Friday after the earnings report is released. The green-framed  box represents the pricing that call option sellers are offering. It implies a 35% chance that Canopy Growth shares will close inside this range by the end of the week if prices go higher. The red box represented the pricing for put options with a 35% probability if prices go lower on the announcement.

It's necessary to note that the open interest featured over 198,000 call options compared to over 76,000 puts. This illustrates that option buyers had a bias toward calls over puts, with a nearly 2.5-to-1 ratio of calls to puts. This implies that option traders expect an increase in share price. However, because the call box and put box are relatively equal in size, it tells us that the high percentage of call options being traded has only mildly pushed expectations higher.

Option pricing for Canopy Growth Corporation (CGC)

The purple lines on the chart are generated by a 10-day Keltner Channel study set at four times the ATR. This measure tends to create highly correlated regions of strong support and resistance in the price action. These regions show up when the channel lines make a noticeable turn within the previous three months.

The levels that the turns mark are annotated in the chart below. What is notable in this chart is that the call and put pricing are in such a close range with plenty of space to run upwards. This suggests that option buyers don't have a strong conviction about how the company will report, even though call volume outweighs put volume. Although investors and option traders do not expect it, a surprising report would push prices dramatically higher or lower.

Volatility pattern for Canopy Growth Corporation (CGC)

These support and resistance levels show a large range of support and resistance for prices. As a result, it is possible that any news, surprisingly bad or good, will catch investors by surprise and could generate an unusually large move. After the previous earnings announcement, CGC shares rose by 5.3% the day after earnings, posting mild gains before beginning to fall for the next week. Investors may be expecting a different kind of move in the price after this announcement. With plenty of room in the volatility range, share prices could rise or fall more than expected.

Market Impact

Considering that marijuana stocks are still very much in their own niche, CGC's earnings likely will have little direct impact on indexes. However, no matter what the report says, CGC's earnings will likely affect stocks in the specialty drug manufacturers industry. A positive report could lift other stocks in the sector such as Cronos Group Inc. (CRON) or Sundial Growers Inc. (SNDL). It could also affect exchange traded funds (ETFs) such as AdvisorShares' Pure Cannabis ETF (YOLO) or JPMorgan's BetaBuilders Canada ETF (BBCA).