"Abandon hope, all ye shorts who enter." That's been the battle cry for soaring Tilray (TLRY) for several weeks now.
Those of us cursed with experience and knowledge of the markets know that the Tilray story will end badly given the stock's current lofty levels -- as high as $238.69 intraday on Wednesday. That's an astounding 1,000%+ above the stock's $20.10 low when it went public just two months ago.
The question on everyone's mind now is: "Where is Tilray's top?" I have no idea, but my fellow columnist Jim "Rev Shark" DePorre recently had a terrific write-up comparing TLRY's rise to the way Ponzi Schemes play out.
Personally, I tend to skew towards the "Greater Fool Theory." That's where you buy an overpriced stock on the theory that you can sell it at a higher price to a bigger fool who'll pay even more for it than you did.
But one thing I think everyone can agree on is that Tilray is a fine example of what happens when you combine a small float, a hot industry and a short-squeeze. It's akin to last year's crazy run on blockchain-related name Longfin (LFIN) .
That being said, Tilray is a real business in a hot sector that should continue to grow over the next decade. And more importantly, people can understand the cannabis industry.
That's not a knock on blockchain, but an observation that folks will often buy what they know -- and there aren't many cannabis companies on the New York Stock Exchange or the Nasdaq to choose from. Many investors might put money to Canopy Growth (CGC) , but when Constellation Brands (STZ) recently cut a deal to invest $4 billion in CGC (along with warrants for another $4.5 billion stake), that essentially capped the stock's short-term upside.
I believe Canopy's acceptance of the Constellation deal was the right move, as cash in the bank is cash in the bank (and $4 billion is a lot of it). But Constellation bought 38% of CGC at around $39 per share and has the ability to boost its stake to more than 50% at an aggregate price in the low- to mid-$40s. That will make investors hesitant to run up CGC's price significantly.
By contrast, Tilray still offers investors what I call "The Dream" -- a chance to participate in the perfect deal with the perfect company. But what deal or company could ever justify TRLY's recent run-up? It doesn't exist, it's a pipe dream (no pun intended).
Frankly, Tilray's current price factors in years and years of growth, so we know this rally isn't a fundamental story. Instead, it looks like a case of short-sellers who've been forced to buy the stock back, coupled with momentum traders who are squeezing them even higher.
How should smart investors play all of this? Well, there's really no way to short Tilray at this point, so that leaves only options trading.
Unfortunately, that game isn't much easier. However, I absolutely think that there's some value to owning Tilray, just not at current levels.
I'd be a willing buyer at a much lower price, so a so-called "ratio-put spread" could work well with Tilray here. This strategy offers some potential upside, along with a set price where you'd buy the stock.
- Buy to open one Dec. 21 $100 TLRY put
- Sell to open two Dec. 21 $75 TLRY puts
Target Net Cost: $0
Maximum Risk: $5,000
Maximum Reward: $2,500
Breakeven Point: $50
Now, spreads are incredibly wide here, so you'll need two things to make this work -- patience and a commitment to buy TLRY at a $50 average cost. I believe that's a reasonable valuation for the shares.
Using a Dec. 21 timeframe should allow plenty of time for the stock's current short-squeeze to end. Canada will also have legalized recreational marijuana as planned by then, while Tilray will have reported quarterly earnings and possibly even unveiled a secondary offering.
I'd also add that there's nothing wrong with simply staying away from Tilray altogether for now. This is an incredibly volatile situation, so whatever route you choose, remain cautious and don't overextend your position.
(This column originally appeared at 11:51 a.m. ET on Real Money Pro, our premium site for Wall Street professionals. Click here to get great columns like this from Tim Collins and other writers even earlier in the trading day.)