The steep discount in cruise line stocks like Carnival (NYSE:CCL) has bottom fishers everywhere itching to cast a line. Today we’re going to look at the signs that stability is returning to CCL stock and show how you can increase your odds of success by using options contracts.
The likes of Carnival and Royal Caribbean Cruises (NYSE:RCL) have been demolished amid a global pandemic. Who wants to take a trip on a ship which may or may not have the novel coronavirus haunting their halls? Not many. Shifting consumer preferences along with government-mandated travel restrictions work directly against Carnival and crews’ business model.
But the grand re-opening has begun. Restrictions are being removed and people are emerging from their hideaways. A new normal is settling in, and the stock market is pricing in a brighter future. No one yet knows how quickly cruise demand will return, though. And that leaves a cloud of doubt hanging over stocks like CCL stock. It’s likely why it has been drifting rudderless for six weeks now. Sellers feel the 80% slashing off the 52-week highs is sufficient to price in the new economic realities. But, buyers remain tepid, lukewarm in their enthusiasm, and thus not yet willing to jam prices higher to join the rousing recovery seen elsewhere.
Let’s take a closer look at the price action.
Looking at the CCL Stock Charts
The gravity of the situation quickly settles in when we look at the weekly time frame. From 2018’s zenith of $72.7 to the March low of $7.80, Carnival sank 89%. No matter how you spin it, it’s a loss of disastrous proportions. And, unlike a broad swath of other stocks that have enjoyed V-shaped rebounds, Carnival’s trajectory has merely shifted from down to sideways. Because of the grim prospects for its business in the near term, its share price has lacked the buoyancy seen in other stocks that are sure to exist in the post-coronavirus world.
It’s as if buyers are waiting for a signal that it’s safe to wade back into the waters. And the gradual reopening isn’t cutting it. On the business side, maybe it arrives in the form of Carnival or one of the other industry giants confirming demand is ramping back up faster than expected. A better-than-expected earnings report could do the trick. If enough parties are surprised, it could lead to a rapid repricing.
On the price chart front, we need a breakout, preferably accompanied by high volume to confirm institutions are returning. Thus far, the past two months appear nothing more than a short spurt of sideways consolidation for CCL stock. On the bright side, if we can breach $20, there aren’t any resistance zones until $30. The runway, in other words, is clear.
I’ve included the daily chart so you can see a more detailed view of the trading range carved out. A small shelf has developed with resistance at $15. A push above that could morph into a rally to $17. That could be good for a short-term trade, but in my mind it’s the eventual break above $20 that would really catch my eye.
Covered Calls for Cash Flow
If your intent on bottom fishing CCL stock here, then you have three choices. First, play the break over $15. Second, wait for more confirmation and take the breakout over $20. Third, buy the stock now but use covered calls to reduce your cost basis and generate income while waiting for the stock to recover. That way, if Carnival dithers for months before moving higher, you’ll still be getting paid.
The Trade: Buy 100 shares of CCL for $14.60 and sell the June $17 call for 65 cents.
The 65 cent premium reduces your effective purchase price to $13.95. If the stock remains below $17 for the next 30 days, then you’ll pocket the 65 cents. That works out to about a 4.6% return. If CCL stock pushes past $17, you’ll capture the max reward of $3.05, which is a 22% return.
For a free trial to the best trading community on the planet and Tyler’s current home, click here! As of this writing, Tyler didn’t hold positions in any of the aforementioned securities.