Bet on Carnival Taking on Water

by John Kmiecik | July 16, 2012 8:16 am

Cruises — like trading — can be a lot of fun. But sometimes there are rough waters ahead and the fun stops. People can get seasick, and traders sometimes lose money.

The market has not been particularly smooth as of late, and neither has the cruise line business. Both seemed to be treading water as of late, and it might not be long before one or both of them sink. However, this trade idea might make you feel better.

Carnival Corp. (CCL – $32.44): Long Puts

The trade: Buy the August 32 puts for 90 cents or less.

The strategy: The long put is an option that benefits from the stock trading lower. The trade profits if the stock falls and the put premium increases to an amount more than was paid. Maximum profit is almost unlimited only because the stock can only fall to $0 (which is highly unlikely), and the maximum loss is 90 cents if CCL finishes at or above $32 at August expiration. Breakeven is $31.10 at expiration based on a cost of 90 cents.

The rationale: Carnival Corp. (NYSE:CCL[1]) controls about half of the cruise industry. Even though the travel industry as a whole has been gaining a little steam, cruise lines have not excelled. The question is: Will the economy be getting better anytime soon? Plus, CCL still is dealing with lawsuits and a tarnished image from the Costa Concordia accident[2] earlier this year.

Technically, the stock is in the middle of a downtrend that started in the middle of June. After trading below its 200-day simple moving average last week, the stock closed basically right at it on Friday. Friday was the first positive day for the stock in the past 11 sessions. A bearish sign for the stock would be if it can trade below Friday’s low, which was $32.22. The next area of support is around $31.

This is a great bearish candlestick formation that has been set. All this trade idea needs now is for the stock to sink!

As of this writing, John Kmiecik did not hold a position in any of the aforementioned securities.

  1. CCL:
  2. Costa Concordia accident:

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