Cruise Ships Can Provide Triple Digit Trading Opportunities
A recent earnings report set up a potentially profitable short-term trading opportunity. Bloomberg reported that “Carnival Corporation & Plc (NYSE: CCL) jumped the most in a decade after earnings and its 2020 outlook topped expectations as the company made adjustments to mitigate effects from the weak European market.
Carnival, which is the largest cruise operator and has significant exposure to continental Europe, was able to meet the challenges in part through adjusting itineraries and effective marketing, Chief Executive Office Arnold Donald said on a conference call [recently].
Fiscal fourth quarter adjusted earnings per share were 62 cents, topping the 50-cent average analyst estimate. The company projected 2020 net cruise revenue will increase 5%.
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The stock soared as much as 9.8% [on the news], its biggest intraday jump since June 2009. Shares of peers Royal Caribbean Cruises Ltd. and Norwegian Cruise Line Holdings Ltd. also rallied.
Carnival’s stock has been punished this year amid concerns about its exposure to European cruise consumers in weakening economies and the Trump administration’s ban on cruising to Cuba, a new market that operators had been betting on for growth.
Stifel analysts led by Steven Wieczynski said the report was a “Christmas miracle,” considering Carnival’s recent trajectory.
“Given how overwhelmingly negative sentiment around CCL shares has been for the past several quarters, we felt it would only require evidence of modest improvement to get the shares moving higher,” the analysts wrote, referring to Carnival by its ticker. They kept a buy recommendation on the stock.
The stock pared gains slightly after two of the company’s cruise ships collided in Cozumel, Mexico.
Carnival Glory struck Carnival Legend as Glory was pulling up to dock this morning. In an emailed statement, the company said it was reviewing damage but that the crash hadn’t affected the seaworthiness of the ships. One guest sustained a “minor injury” during an evacuation from the dining room.
Carnival said itineraries weren’t affected.”
This could mark a bottom for the stock which has been under selling pressure for more than two years. However, the stock does face resistance near recent highs and that is a risk to investors.
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 usually 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 has 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.
A Specific Trade for CCL
Every day, we scan the markets looking for trades with low risk and high potential rewards. These trades are available almost every day and we share them with you as we find them. Now, it’s important to remember these are trading opportunities in volatile stocks.
When we find a potential opportunity, we evaluate it with real market data. But because the trades are volatile, the opportunities may differ by the time you read this. To help you evaluate the current opportunity, we show our math and explain the strategy.
For CCL, the April 17 options allow a trader to gain exposure to the stock.
An April 17 $50 call option can be bought for about $2.77 and the April 17 $52.50 call could be sold for about $1.62. This trade would cost $1.15 to open, or $115 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 $115.
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 $1.35 ($52.50 – $50= $2.50; $2.50 – $1.15 = $1.35). This represents $135 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $115 to open this trade.
That is a potential gain of about 117% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.