16 Oct

Aurora Cannabis Stock Is Gearing Up for a Breakout

WRITTEN BY Oleksandr Pylypenko

In the October 15 trading session, Aurora Cannabis (ACB) stock closed at $3.76, up 7.12% from the previous session. This performance lagged the S&P 500’s 1.00% increase on the day. The Dow Jones gained 0.89%, while the Nasdaq surged 1.24%.

There have been several bullish bets placed on ACB, suggesting that it could surge higher in the coming weeks and months. For this reason, I’d like to discuss the stock’s recent options trades and what they mean for investors. 

A 13% move in Aurora Cannabis stock

The implied volatility for the options, at a $4.00 strike price that expires on October 25, stands at 83.59%. This number means that investors are expecting an event that could cause significant movement in one direction or the other.

Looking at the October 25 options, I see a bid/ask for the $4.00 call option of $0.11/$0.12. I also see a bid/ask for the $4.00 put option of $0.38/$0.39. Keep in mind that the options strike closest to the previous ACB closing price of $3.76. We can calculate the expected price move using the mid-prices of these options:

0.385 (4.00 put) + 0.115 (4.00 call) = 0.5/3.76 = 13.3%

As we can see, the options imply that ACB could rise or fall by ~13% by the October expirations from the $4.00 strike price using the long straddle strategy. This assessment would place the stock in a trading range of $3.27–$4.25 by the expiration date. Moreover, the puts at the $4.00 strike price outweigh the call options by about 2:1, with 2,281 open puts to 910 open calls. This imbalance suggests the market sentiment is bullish rather than bearish on ACB.

Bullish options bets for Aurora Cannabis

The open interest levels for the October 18 $8.00 calls increased significantly on October 15. According to Barchart, the number of open contracts rose by 15,000 to about 15,379. A buyer of the calls would need the stock to rise to $8.03 by the expiration date to break even. 

Additionally, the $8.00 puts for the same expiration date have seen increased open interest levels by about 15,000 to a total of 15,068. However, what’s most interesting is that the puts were traded on a bid, which suggests that the contracts were sold. When considering these two trades, it appears a trader has made the spread transactions by buying the calls and selling the puts, which generally means that this transaction was a bullish bet.

Moreover, the options, which expire on December 20, also saw increased call buying on October 15. The open interest for the $5.00 calls rose by 3,816 contracts to a total of 12,474 open contracts, according to Barchart. A buyer of those calls would need the stock rise to $5.19 by the expiration date. That’s a gain of about 38% from ACB’s current price.

Technical outlook

Looking at the daily chart, we can see what is going on with Aurora Cannabis. Currently, the stock is floating at around $4.00, which remains a critical resistance area to watch. It’s also trading 70% off the 52-week high it reached in October. In the near term, the stock might rally to the technical resistance level of $4.00. Breaking this level would send the stock close to its next level of resistance, which would be around $5.00. However, not breaking above $4.00 would send the equity close to its previous low of around $3.4. Finally, the RSI index recently reversed its trend, suggesting bullish momentum entering into the stock. 

Analysts’ coverage and target price

Wall Street analysts have upgraded ACB over the last six months. The consensus price target was $7.94, which represents a 111.24% upside. See MarketBeat for a detailed breakdown. According to TipRanks, ACB is a “hold” with an average price target of $6.83, representing an 81.65% upside. What’s more—among the 15 analysts covering ACB, six have given it “buys,” six have given it “holds,” and three have given it “sells.”

Simply Wall St also confirms that the stock is significantly discounted. Aurora Cannabis’s future cash flow value is $7.38 compared to its $3.76 closing price.

Looking for more analysis of cannabis stocks? Check out Cannabis Stocks in the Green: APHA, WEED, CTST, ACB and What Legalizing Cannabis Means for Mexico.

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