What's Hiding behind Tilray's Wild Ride Yesterday – The Motley Fool

Shares in a marijuana company Tilray Inc. (NASDAQ: TLRY) Yesterday did a roller coaster ride that probably left many investors with the whiplash. In the last trading hour on Wednesday, Tilray's shares went from almost doubling to a loss before settling in with a 38% gain. The crazy volatility of the last hour has resulted in the halting of transactions on Tilray's shares five times. Here is what you need to know about the wild race of today.

Triggering circuit breakers

The stock market has created circuit breakers to control failed markets and prevent stock market crashes. These circuit breakers are not designed to prevent investors from trading in shares, but they are in place to help slow the pace of trading so that all market participants can execute their purchases and sell them in an orderly manner.

In the case of Tilray, the significant fluctuations in its share price triggered the limit-limiting mechanism of the Securities and Exchange Commission.

This specific breaker is activated if an action is trading outside of a "specified price range". The band is a percentage higher and lower than the average price of an action in the previous five minutes. Specifically, if a share is traded out of the band by a fixed percentage (10% for S & P 500 / Russell 1000 shares or 30% for other securities traded at more than $ 1 per share) for 15 seconds, the trading of the shares is interrupted for five minutes. .

Bands double "during the open and close times of the trading day" to provide additional protection against fluctuations caused by pre-market activity or pre-closing decision making.

What caused the volatility of Tilray?

The crazy day of Tilray is an example of what can happen when pent-up demand, rising interest and converging catalysts converge.

Until recently, US investors had few marijuana securities to choose from on the major US stock exchanges. Cronos (NASDAQ: CRON) listed on Nasdaq and Canopy growth (NYSE: CGC) listed on the New York Stock Exchange earlier this year, but it was only last July that Tilray was floated on the Nasdaq stock market.

The IPO of Tilray helped free the demand of forbidden institutions to buy over-the-counter shares and, as a result, Tilray's shares have steadily increased since its IPO. However, the rise in its price has attracted bearish investors who have increasingly bet that the valuation of several billion dollars of Tilray is untenable given its annualized turnover of less than 40 million dollars.

Short-term TLRY data by YCharts.

In September, these downward bets were put to the test, with optimism for marijuana stocks rising before the opening of the Canadian market for recreational marijuana next month and rumors that Coca Cola (NYSE: KO), knocked on the doors of marijuana companies about collaborations.

The tussle between bulls and bears seems to have reached its climax today. The two-digit percentage increases in Tilray's share price, coupled with the high lending costs of short sellers, resulted in a short narrowing that boosted the share price to $ 300 (94% gain). When sales stopped and traders quickly recorded their intraday gain, Tilray shares fell by 150 points in the space of about an hour at the end of the day.

It is this sale that has triggered the rule of the limit upward limit of the SEC. The first five-minute break in trading occurred when shares went from $ 300 to about $ 230 in 10 minutes between around 2:50 pm. EDT and 15h EDT. Then, while stocks continued to fall to 151.40 dollars, their trading was suspended four more times between 3:20 pm. EDT and 15:45 EDT.

In the end, Tilray 's stock ended the day up 38% to 214.06 dollars, with over 31 million shares Tilray changing hands. For the prospect, the average daily trading volume on the stock is about 8.1 million shares.

TLRY Price data by YCharts.

What to do now?

Industry observers believe the global marijuana market could earn more than $ 200 billion in 15 years, but Tilray is already selling more than 500 times its quarterly annualized sales.

Its valuation may have tempted you to sell stocks short in Tilray, but, as Sean Williams, another fool recently pointed out, the associated borrowing costs are high. In addition, as short selling exposes investors to unlimited risks, betting against high-dynamic stocks such as Tilray is particularly dangerous.

Instead, you'd probably be better off considering Tilray's crazy day as a reminder that short-term trading can be dangerous and you're watching this stock for now.

Todd Campbell has no position in the mentioned actions. His clients may have positions in the companies mentioned. The Motley Fool has no position in the stocks mentioned. Motley Fool has a disclosure policy.