Wednesday will be a big day north of the border, as that's when Canada will become the first major economy to legalize recreational cannabis. Ahead of this landmark event, stocks billed as cannabis-related have been quite volatile. Here's how I'm playing things.

An Overview

To understand the legal-cannabis business, you must first understand that this isn't really just one business.

There are the firms that grow and produce the plant, there are firms that will market to the recreational user and there are others that target only medical use. And then there are the large multinational corporations that have either sought or consummated deals within the legal-weed space to produce beverages, or other consumables to infuse either THC or CBD into newly developed products.

Best In Class: Canopy Growth

In my opinion, Canopy Growth (CGC) is best in class in the pot space. One huge reason would be the $4 billion investment that alcohol giant Constellation Brands (STZ)  made in the company back in August. Constellation, whose brands include Corona and Modelo beers, increased its Canopy stake from 9% to 38% as part of the deal, and Canopy CEO Bruce Linton talked of developing cannabis-infused beverages.

However, Canopy traded in about an $8 range Tuesday before closing 6.8% lower at $53.01. Given that the stock has successfully tested the $45 support level three times since early September, I would rather wait before buying the stock:

Or, we could sell a $45 Nov. 16 put rather than buying the stock directly.

Other Weed Stocks to Consider

There are several other major players in this space that the retail investor needs to be cognizant of. Those names would be Aphria (APHQF) , Aurora Cannabis (ACBFF) , Cronos Group (CRON) , GW Pharma (GWPH) , and the now infamous Tilray (TLRY) . I say "infamous" because TLRY has been more known since August for extreme volatility that put noted short-seller Andrew Left in the spotlight than for anything else.

Of those majors, there have been recent rumors putting Aphria together with tobacco grower Altria (MO) for a possible minority investment, and there have been other co-developer type rumors in that past concerning Aurora and Coca-Cola (KO) that appear to have not turned into hard news. Aurora also has been in the news of late as the firm is set to re-domicile their U.S. listing to the New York Stock Exchange.

This should give this name -- which has battled the forces of dilution in the past -- a higher profile and better accessibility for investors. Aurora is also the cannabis stock that I have the most experience with. TheStreet's Stocks Under $10 model portfolio, which I co-manage, has been long this name twice and made money twice. We're currently flat the name, but will probably buy it again if it dips below $10.

The Bottom Line

You might recall that California legalized recreational pot on Jan. 1, and that cannabis stocks rallied into that event, much as they've done ahead of Canadian legalization Wednesday. But then the sector saw a sell-off, and I feel it more than likely that the industry will experiences something like that again after Wednesday.

Many names didn't return to their January highs for another six to eight months. For those of you who have already enjoyed a nice run, I might take a little something off and protect your profits.

For those of you who are flat in the sector and want to be involved, there are three ways to go, in my opinion:

  • Best in Class: Canopy Growth
  • Less Downside with a Short-Term Supportive Catalyst: Aurora Cannabis
  • Some Exposure Without Doing Much Homework: Buy a cannabis ETF. One that actually trades in respectable volumes would be the ETFMG Alternative Harvest ETF (MJ)

(This article has been updated.)

At the time of publication, Stephen Guilfoyle had no position in the securities mentioned.

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