Carnival Cruise Could Offer a Low Risk, Triple Digit Trade
Trade summary: A bull call spread in Carnival Corporation & Plc. (NYSE: CCL) using the October $20 call option which can be bought for about $2.23 and the October $25 call could be sold for about $0.95. This trade would cost $1.28 to open, or $128 since each contract covers 100 shares of stock.
In this trade, the maximum loss would be equal to the amount spent to open the trade, or $128. The maximum gain is $372 per contract. That is a potential gain of about 190% based on the amount risked in the trade.
Now, let’s look at the details.
Traders have been cautious on CCL, understandable given the risks COVID presents to the cruise industry. The stock recently gave a buy signal on the Derivative Oscillator as shown in the chart below.
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The Derivative Oscillator is an oscillator that applies the MACD calculations to the RSI study (instead of price). The result is an oscillator that trades around the zero line, indicating market bias. The indicator tuned bullish as potentially bullish news about the company broke.
Barron’s reported, “Carnival, the world’s largest cruise operator, [announced] plans to resume cruises out of Italy this weekend.
Passenger cruises have been suspended since mid-March because of the pandemic.
Carnival’s Italy-based Costa Cruises is scheduled to have one of its vessels, Costa Deliziosa, depart on Sunday from Trieste, followed by other sailings this month out of that country.
Carnival plans to have its Germany-based AIDA Cruises resume sailings on Nov. 1. AIDA had planned to resume sailings last month, but had to postpone those voyages, initially because it hadn’t secured approvals from Italy where those vessels are registered.
In a [recent] news release …, Carnival said those two brands “will begin in a gradual, phased-in manner with six initial ships and limited itineraries.”
Among the health and safety protocols cited on Costa’s Website are staggered passenger boarding times, the installation of new air filters, a requirement that masks be worn in public areas, and reduced occupancy. Other measures include limiting occupancy in common areas aboard the ships and enhanced cleaning and disinfecting.
U.S. ports remain closed because of a no-sail order by the Centers of Disease Control and Prevention. That order, which is in effect through Sept. 30, could be extended as the cruise companies work on new health and safety protocols.”
The daily chart shows that the stock appears to be completing a months long basing pattern, a potentially bullish pattern that confirms the outlook of the weekly chart shown above.
A Specific Trade for CCL
For CCL, the October options allow a trader to gain exposure to the stock. This trade will be open for about six weeks and allows for traders to turn over capital quickly, potentially compounding gains several times a year.
An October $20 call option can be bought for about $2.23 and the October $25 call could be sold for about $0.95. This trade would cost $1.28 to open, or $128 since each contract covers 100 shares of stock.
The amount paid to enter the trade is the largest possible loss on the trade. This is generally true whenever a trader is creating a debit to enter an options trade. “Creating a debit” means there is a cost to enter the trade. You could create a debit by simply buying puts or calls to open a directional trade.
In this trade, the maximum loss would be equal to the amount spent to open the trade, or $128.
The maximum gain on the trade is equal to the difference in exercise prices less the amount of the premium paid to open the trade.
For this trade in CCL, the maximum gain is $372 ($25- $20= $5; 5- $1.28 = $3.72). This represents $372 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $128 to open this trade.
That is a potential gain of about 190% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.
A Trade for Short Term Bulls
As with the ownership of any stock, buying CCL could require a significant amount of capital and exposes the investor to standard risks of owning a stock.
To reduce the risks of a trade, an investor could purchase a call option. This allows them to benefit from upside moves in the stock while limiting risk to the amount paid for the options. However, buying a call option can also require a significant amount of capital and includes the risk of a 100% loss.
Whenever an option is bought, the maximum risk is always equal to 100% of the amount of spent to purchase the option. Since options cost significantly less than a stock, the risk in dollar terms will be relatively small to own an option.
To further limit the risks of the trade, an investor could use a bull call spread. This strategy consists of buying one call option and selling another at a higher strike price to help pay for the cost of buying the first call. The spread strategy always reduces the risk of an options trade.
This strategy is designed to profit from a gain in the underlying stock’s price but the benefit of avoiding the large up-front capital outlay and downside risk of outright stock ownership. The potential risks and rewards of this strategy are summarized in the chart below.
Source: The Options Industry Council
Both the potential profit and loss for the bull call spread are limited. The maximum loss is equal to the net premium paid when the trade is opened. The maximum profit is limited to the difference between the strike prices, less the debit paid to put on the position.
This strategy could be especially appealing with high priced stocks where the share price and options premiums are often a significant commitment of capital for smaller investors.