Pot stocks are on fire, and according to one trader the group is setting up to go even higher.
A number of cannabis stocks were on the move Monday afternoon after Toronto-based weed supplier Tilray scored a new partnership with the Nova Scotia Liquor Company. The report sent shares of Tilray up 20 percent, hitting a new all-time intraday high of $54.16 and gave a boost to other names in the space, including Cronos Group, which also rose 20 percent, and Aurora Cannabis, which jumped nearly 6 percent.
Tilray is just the latest pot stock to catch a bid from larger corporations seeking to take advantage of the potential widespread legalization of marijuana use. The momentum began earlier this month when alcohol beverage giant Constellation Brands announced a record $4 billion dollar investment in Ontario-based marijuana company Canopy Growth — the stock surged 90 percent since then and is now trading at all-time highs.
As a way to take advantage of the pot stock surge, CNBC's "Options Action" trader Mike Khouw recommends a call spread in shares of Canopy Growth.
"Obviously what we've seen is that the stock has made this real sharp move here, and so one of the things we want to do is avoid a risk of a move back down," he said Friday on "Options Action."
Khouw's strategy involves purchasing the October 47.5 calls for $4.00 and selling the October 60 calls for $2.35. The trade breaks even at $50.15 and sees gains up to $60, or more than 25 percent higher from Canopy Growth's current stock price by October expiration.
Many of the major players in the cannabis space have seen double-digit gains this month as rumors of other impending corporate investments in the space have ignited a surge of investor optimism. According to "Fast Money" trader Tim Seymour, the group has much more room to grow.
"What we're seeing cannabis traders do is they're rotating into U.S. names, and that's something that ultimately I think you want to take a look at,' Seymour said Friday on CNBC's "Options Action." Seymour also noted that while Canada's newly legalized recreational weed law sets up for a big growth opportunity, the U.S. market has the potential for 15 times the amount.
Shares of Canopy Growth are up 98 percent year to date and were trading higher on Monday afternoon around $46.90.