Stocks overall have put in quite a performance since the Fed decision on March 15. The S&P 500 has risen almost 9% while the NASDAQ 100 popped over 13%. Those gains, though, pale in comparison to what the pot stocks have done. The marijuana ETF…
This red-hot rally was further fueled on news that a House panel will vote next week to decriminalize marijuana. Doubtful the Senate will pass it, so it may once again be posturing on the part of the politicians.
The shorts have been squeezed hard as evidenced by the recent price action. The ETF MJ (yes it stands for Mary Jane) is by far the most overbought it has been in the past year.
The 9-day RSI just broke past 70. MACD is at the highest levels of the prior 12 months. Bollinger Percent B exploded over 100. The last time all these indicators even came close to these readings marked a significant top in Marijuana stocks.
Friday saw over 24,000 calls trade in MJ versus just 887 puts. This type of over-the-top call buying is usually a reliable contrarian indicator that the bullish euphoria has gotten way overdone.
Implied volatility (IV) is at an extreme as well. Current implied volatility stands at the 100th percentile. This means option prices are the most expensive they have been in the past year.
This favors option selling strategies when constructing trades. The best way to position for the euphoria to begin to wear off is by selling out-of-the money bearish call spreads. These defined risk trades provide ample upside cushion while potentially generating solid returns.
Here are three Sell rated Cannabis stocks to consider along with example call spreads…
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