A potential pot crackdown by Washington hit high-flying cannabis stocks late this week, and some traders are betting that one hot name is about to cool off even more.
On Thursday, Attorney General Jeff Sessions announced that federal prosecutors will now be able to decide how to proceed when state legalization rules clash with federal drug laws.
This as California legalized the recreational use of marijuana, which sent stocks like Emerald Health Therapeutics, Aurora Cannabis and Weed soaring. Despite weakness in the last two sessions, they are still up a respective 41 percent, 40 percent and 35 percent in just the past week.
Another name that's gotten a boost from the pot trend is Scotts Miracle-Gro, a lawn and garden products company which has recently been focusing on hydroponic devices that allow people to grow plants indoors. The stock is up 6 percent in the last month.
"The CEO of the company actually said that he had hoped that they would earn 20 percent of their revenue by 2020 by hydroponics, which happens to serve that [pot] industry," Mike Khouw, president of Optimize Advisors, said Thursday on CNBC's "Options Action."
However, options traders are not as optimistic on the stock. According to Khouw, the options market saw 40 times the average put volume in Scotts Miracle-Gro during Thursday's trading session.
There were buyers of 1,500 Jan. 100-strike puts for 30 cents. That means that traders see Scotts Miracle-Gro below $99.70 by January expiration – which is about 7 percent lower than Friday's trading price.
Nevertheless, for those who want to play the marijuana industry, Scotts Miracle-Gro is "poised to take off ... and it's probably not a bad way to play the [pot] space," Khouw said.
Shares of Scotts Miracle-Gro were at $107.35 midmorning Friday.