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Tilray Brands Inc (Nasdaq: TLRY) soared on market open today after coming in ahead of Street estimates for its fiscal Q1, with net income printing at $1.5 million and revenue climbing to a record $210 million.

Part of the momentum this morning is related to optimism around cannabis rescheduling under the Trump administration as well.

Still, options traders are evidently positioning for downside ahead.

According to Barchart’s options data, near-term expected move in TLRY shares is 16.53% with a skew toward the lower bound of $1.803, and longer-dated contracts expiring January 2025 reflect a similar caution as well.

Here are the top three reasons why options pricing in Tilray stock remains tilted to the downside.

Margin compression could weigh on Tilray stock

While top-line growth and return to profitability grabbed headlines on Thursday, a closer look at Tilray’s earnings release reveals margin pressure and segment-level weakness.

In Q1, the company’s gross margin dropped 300 basis points (year-on-year) to 27% due to a steep four percentage points decline in cannabis margins.

Moreover, the beverage unit – once touted as a growth engine – posted flat revenue and declining margins as well, with gross profit slipping as much as $1.6 million versus a year ago.

Tilray’s chief executive, Irwin Simon, acknowledged the drag, citing SKU rationalization under Project 420.

For a company banking on diversified growth, these trends raise questions about scalability and pricing power.

Options traders may, therefore, be hedging against a reversal in TLRY shares once earnings euphoria fades and fundamentals reassert themselves.

Regulatory risk remains an overhang for TLRY shares

Tilray shares have exploded in recent months, partly because of optimism surrounding US cannabis rescheduling and European liberalization.

But options markets are signalling caution as regulatory timing and execution risk loom large.

While the DEA’s proposed reclassification of cannabis to Schedule III is a step forward, it doesn’t guarantee full legalization or immediate revenue upside.

Similarly, European markets remain fragmented, with Germany’s legalization still in early stages. “We’re confident in our global platform,” Simon said, “but regulatory progress takes time”.

Traders may be pricing in the possibility that these catalysts take longer to materialize – or that competitive dynamics dilute their impact.

In short, the regulatory tailwind for TLRY stock is real, but not yet reliable.

Tilray Brands remains a penny stock

Finally, options data is skewed to the downside also because Tilray is a penny stock prone to unusual volatility – seeing sharp moves based on hype and retail momentum instead of fundamentals.

While the company regained Nasdaq compliance this quarter, its high float and low institutional ownership mean sentiment can swing fast.

Over a billion TLRY shares were traded in August and September alone, which reflects speculative interest more than fundamental conviction.

Options traders often hedge aggressively in such setups – anticipating volatility irrespective of earnings. For long-term investors, the penny stock label is a red flag: it signals risk, not resilience.

Until Tilray builds a more stable valuation base, downside protection will remain in demand.

That’s why Wall Street rates Tilray stock at “hold” only with mean target of 93 cents indicating potential downside of nearly 60% from here.

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