The Short-Term Bearish Case for Royal Caribbean Cruises

The market made another big leap higher yesterday, but there is still more headline risk to worry about. The cruise industry did particularly well yesterday, with Royal Caribbean Cruises Ltd. (NYSE:RCL), Carnival Corporation & Plc (NYSE:CCL) and Norwegian Cruise Line Holdings Ltd. (NYSE:NCLH) all gaining over 15%.

Each of these three companies has suspended most if not all of their cruises since March 14. That 30-day suspension will be up soon, but this pandemic is ongoing, even if things are looking better in Europe.

The Centers for Disease Control and Prevention (CDC) are, as of this writing, still recommending travelers avoid all cruise travel.

I am not suggesting any of these companies are going to be bankrupt soon, but if they do recover, it will be slowly. Of the three, RCL looks like the strongest target for a simple put debit spread.

Customers Will be Slow to Return

Before yesterday’s optimism gave the cruise industry a boost, RCL was struggling to remain solvent. The company entered a $2.2 billion loan agreement in late March, and according to a recent filing it has tapped into $3.48 billion in backup financing.

Investors may see the slowing spread in Europe as good news for the future of the COVID-19 outbreak, but there are still longer-term economic effects to contend with.

Cruises are a luxury, and companies like RCL are going to struggle now that millions of people have lost their jobs.

Even after this pandemic is under control, the cruise industry will have an image problem. Cruise ships were still dealing with outbreaks last week. Though roaming ships have finally been allowed to dock, investors shouldn’t forget how seriously RCL and other cruise companies were affected by this.

Retesting Up-Trending Support

RCL has lost over 70% of its value since the start of this year. It’s not unreasonable to think the stock found a bottom in mid-March. But on the chart below, you can see that shortly after finding that bottom, the stock rallied and fell again.

Daily Chart of Royal Caribbean Cruises Ltd. (RCL) — Chart Source: TradingView

The line in the chart above shows that RCL is making higher lows. While that is good news for its long-term share price, it is also good news for people buying bearish put options.

RCL is going to retest its up-trending support at some point, and based on the chart above, I believe its next bottom will fall in the mid-$20 range.

By using a put debit spread, traders can reduce the cost of entering this trade while still taking a bearish position. With an upper strike price of $28, this trade will prepare traders for RCL’s next pullback.

Using a spread order, buy to open the RCL May 1st $28 put and sell to open the RCL May 1st $25 put for a net debit of about $1.30.

Note: Be sure you are opening the weekly RCL options that expire on Friday, May 1, 2020.

About Put Debit Spreads

A debit spread is simply a way to lower the cost of buying options, as the option that you sell to open (short) helps offset the cost of the option that you buy to open. Therefore, this put debit spread is a way to lower the cost of buying bearish put options. Many brokers will require the use of margin and/or a set amount of reserved capital to execute a debit spread; contact your broker directly for specific requirements.

InvestorPlace advisor Ken Trester also brings you Power Options Weekly, which delivers 5 new options trades and his latest trading advice to you each Friday. Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990.

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