Time to Sail on Carnival Options?

A bull call spread is a way to play an upside earnings report

By Joseph Hargett, InvestorPlace Contributor


Cruise line operator Carnival (NYSE:CCL) is scheduled to release its third-quarter earnings report ahead of the open on Tuesday, Sept. 25. Currently, Wall Street expects the company to post a profit of $1.46 per share, a figure that’s down sharply from earnings of $1.71 a year ago.

Historically, the firm has been a solid performer on the earnings stage, besting the consensus estimate in three of the prior four reporting periods, with an average upside surprise of more than 118%.

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Despite that positive track record, the brokerage community appears evenly divided on Carnival’s outlook. Specifically, the stock has attracted 11 buy ratings, compared to 11 hold or worse ratings. Additionally, the average 12-month price target of $38 rests a mere 1.6% above CCL’s Friday close at $37.39, hinting at low expectations for additional upside potential.

Options traders are also divided when it comes to CCL. Specifically, the stock’s front-month put/call open interest ratio arrives at 0.73, with calls only marginally outnumbering puts heading into Carinval’s earnings report. A closer look reveals that peak call open interest totals 12,462 contracts at the in-the-money October 37 strike, while peak put open interest numbers 4,063 contracts at the out-of-the-money 37 strike.

From a technical standpoint, CCL shares are trading in annual high territory above the $37 level. Following a sharp run higher over the past several weeks, the stock has now entered a period of consolidation, which could bode well for investors heading into tomorrow’s earnings report.

For those looking to get in on a pre-earnings play on CCL, implieds on the stock’s October options are hinting at a potential post-earnings move of about 6%. Therefore, an October 37/39 bull call spread might fit the bill.

This trade was last offered at $1, or $100 per pair of contracts, placing breakeven at $38 — a gain of about 2.7% from Friday’s close. A maximum profit of $2, or $200 per pair of contracts, is possible if CCL closes at or above 39 when October options expire.

As of this writing, Joseph Hargett didn’t hold a position in any security mentioned here.

Article printed from InvestorPlace Media, https://investorplace.com/2012/09/time-to-sail-on-carnival-options/.

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