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Bearish Options Traders Pile on Carnival

Betting it'll get worse, traders bought and sold 77,000 puts Tuesday


If there’s one truth in the equity and options markets, it’s that investors will continue to make decisions based on the emotions of fear and greed. These simple human sentiments will continue to act as a pair of Achilles’ heels for traders no matter what technological advances help inform our trading decisions.

Tuesday, Carnival (NYSE:CCL) stock took it on the chin as investor fear manifested itself as heavy selling pressure. In the increasingly unsettling aftermath of last Friday’s Costa Concordia tragedy, parent company CCL dropped more than 13.5% on the day, coming within 2% of its 52-week low.

The knee-jerk selling pressure trickled down into the options pits. A whopping 104,000 options traded during Tuesday’s session — 77,000 of which were puts. (For the beginners among us, puts are typically considered to be bearishly skewed options, used by investors who expect the underlying stock to move lower.)

More than one-quarter of the options that traded Tuesday were concentrated between the January 27 and 32 put strikes. What’s especially notable is that these options will expire this Friday – in a matter of days. Based on Tuesday’s market data, it looks as though traders sold the 27-strike puts and bought the 32-strike puts simultaneously.

A put seller has the obligation to buy the stock at the put strike (in this case, $27) no matter how far the stock may fall. Put buyers, meanwhile, have the right (not the obligation) to sell the shares at the associated strike price ($32 here).  Both this obligation and this right extend from the time of the transaction through its expiration.

Blocks of 10,000 options changed hands about an hour into the session, when CCL shares were trading around $29. Out of the money by $2, the 27-strike puts traded for just a nickel per contract (which was the bid price at the time, implying they were sold). The 32-strike puts, in the money by $3, traded for the ask price of $2.35. In short, the trader paid a net debit of $2.30 to execute this bear put spread that has a very short life span.

The most this investor can lose is the $2.30 paid for the spread. This 100% loss occurs if CCL manages to rise back above the purchased option price of $32 by expiration on Friday. The maximum potential gain, meanwhile, is the difference in strike prices less the premium paid, or $2.70 (32-27-$2.30). Profit is maximized at expiration if CCL is trading below the 27 strike.

Breakeven for this particular spread is $29.70, or the purchased option strike less the overall premium paid. If CCL is trading at or below this price when the closing bell rings on Friday, the spread will be profitable for the trader (before commissions and fees).

It appears as though this trader expects a bit more downside from CCL in the very short term but sold some out-of-the-money puts to slightly offset the cost of the in-the-money puts. This is a popular strategy among option traders because it can lower the cash outlay. In this case, the nickel collected for selling the 27-strike puts didn’t lower the overall trade cost by much, but it does add up when one is trading 10,000 contracts in one shot. It will be interesting to watch CCL shares over the next few days and see if the trader was able to make a quick buck or two.

And at least CCL shareholders had some company in their misery yesterday. Royal Caribbean Cruises (NYSE:RCL) shares dropped more than 6% during Tuesday’s trading. Option volume reached roughly 30,000 contracts, up from about 5,000 contracts traded on Friday. The put/call ratio was notable as well, with 24,000 puts changing hands compared to just 6,000 calls. Perhaps traders had a similar strategy in mind for the CCL rival.


Article printed from InvestorPlace Media,

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