Carnival Cruises (NYSE:CCL) stock rallied ferociously off the March and April lows, but it has given up much of the gains. This doesn’t mean that the recovery is over. Investors who chased it late in the June rebound are in trouble, but that was totally avoidable. Regardless, the CCL stock opportunity from here is that there is more upside potential than downside risk over time.
Chasing big rallies just out of the fear of missing out is a powerful motivator and can cause investors much grief. This happened with cruise ship stocks this year.
CCL rallied over 220% from low too high in just two months. Most of the move was on the back of vaccine headlines from the likes of Novavax (NASDAQ:NVAX) and Moderna (NASDAQ:MRNA). Even Pfizer (NYSE:PFE) got in on the action recently. In May, I warned against blindly chasing these pops. Even though I didn’t catch the absolute top of the monster rally, the stock is now 25% below my level of caution.
My bearish tone back then was not anything against the company itself, but because of the environment surrounding the whole industry. We still have no vaccine, yet the hopes for it are running rampant. The experts assure us that we could get it this year, but I fail to see how that is possible. Consequently, markets are vulnerable until they too reverse some of the froth they built up from those assurances just in case the experts are wrong. They sound very confident but there needs to be several miracles for that to happen.
Fear of Crowds Remains a Real Threat to CCL Stock
Meanwhile the fear of crowds is very real. States like California are re-shuttering businesses after infection flare-ups. I am not in that excessive fear camp. In fact, I recently took my vacation to Mexico and in the process boarded four flights. I came in close contact with the locals there and other vacationers. We ate at buffets and shared a few drinks at the bars. I am happy to report that we are all still free of Covid-19, but my perspective is not the norm, at least not in the media’s rhetoric.
On the other hand, I can attest that travel is still but a fraction of what it was last year. The airports are still empty even at peak hours. The lines at immigration stations, which usually are a mile long, were deserted. This is further evidence that the CCL stock remains challenged because the industry is severely hampered. There isn’t going to be a lot of cruising anytime soon, at least not before other basic necessary forms of transportation recover from their severely depressed levels.
I am sure this notion already upset a few readers and fans of the stock and that is definitely not my intention. I initially wrote about buying the dips in CCL when panic was extreme, so I’m consistent in rejecting bullish and bearish anomalies.
More often than not somewhere in the middle always lies the truth. With that, there is a definite opportunity to trade CCL stock today while leaving room for the bulls and bears to fight it out.
I choose to be optimistic so I will assume that this crisis too shall pass. Eventually Carnival and other cruise companies will be free to sail again to repair their businesses. There is hope in its chart because it has been setting a trend of higher-lows off the bottom. This is proof that the bulls are consistently stepping up to buy the dips.
With a Bit of Luck There Could Be Upside Surprises
Moreover, the bulls can trigger another leg higher if they can close above $18 per share. They can rally another $3 from there but they will face resistance. For that to happen, perhaps the industry will need a headline to unshackle its operations once and for all. Since it is not imminent, it makes no sense to buy call options to capture that move.
The better ways of profiting from this is to either buy the shares for a long term thesis, or sell options to create income. I favor using options because at least there investors can get long CCL stock and leave plenty of room for error.
Options are safer than owning shares if used in situations like these. If investors buy shares of CCL stock now, they put $14 at risk right away with no buffer zone and they would need a rally to profit.
Conversely, if they sell the January $10 put they collect $1.60, so no money leaves their account. The transaction is a net credit today and they don’t need a rally to win. The worst that could happen is they could own the shares at $10 which is a 30% discount from here.
If CCL stock falls to $9 per share this year, those who bought the shares would already be down 35%. Compare that to someone that sold the puts would still be profitable. That position doesn’t start losing money until the stock falls below $8.40.
Don’t confuse this with a foolproof method of profits because the traders still have to do homework and structure a proper thesis. Whether using options or shares, CCL stock is still speculative here.
The point is that this is a perfect environment for investors to study new ways of trading that mitigate risk. Options are scary but only to those who don’t study them well. This is also true to trading stocks willy-nilly.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities.