Carnival (NYSE:CCL) is making waves. Sure, the lion’s share of its ships are still stuck in port. And, yes, millions of would-be cruisers continue to see their planned vacations canceled or postponed. But that has already been known for months. Such ominous-sounding facts are the reason why CCL stock and its peers have seen their share prices smashed to pieces.
Contrarians have hounded cruise stocks for months now. Short of a glorious run in early June, they haven’t gained much traction. Fortunately, the headlines are finally giving them a reason for optimism.
“Reopening stocks” are booming following better-than-expected news on the vaccine front. This month, Pfizer (NYSE:PFE) and Moderna (NASDAQ:MRNA) announced their novel coronavirus vaccines were extremely effective and are moving speedily toward approval.
With the end of the pandemic nigh, spectators decided to jump in the pool finally. Cruiselines, airlines, hotels, banks, energy companies — you name it. The lot of them are all galloping higher. Wall Street waits for no one, and investors are running headlong into the stocks most poised to profit from the coming economic rebound.
Consider this the latest in an endless line of examples illustrating the forward-looking, discounting nature of asset prices. The surge in Carnival shares has been sudden and substantial. Let’s take a closer look and discuss why I think naked puts could be a lay-up trade here.
CCL Stock Is Looking Up
The initial Pfizer news sent CCL stock to the moon. Its share price rose 44% on Nov. 9. Moves of that magnitude in a single session are incredibly rare. It signals a monumental sentiment shift, and I believe a sustainable change in the trajectory. It doesn’t mean that we won’t see pullbacks and pauses. It means that bulls can more confidently use them as buying opportunities.
Buying dips now has a lot more firepower behind it. Think about how jarring the Nov. 9 moonshot must have been for short-sellers. There’s nothing like a nearly 50% haircut to wake you up in the morning and make you reconsider your position. The days of the smug bear in Carnival are over. The lot of them are now as skittish as ever, and I don’t blame them. This should translate into less downside follow-through on price drops and quicker rebounds.
The odds, in other words, now better favor buyers.
The three-day retreat following the up-gap bounced right where it needed to at the 50-day moving average. We now have a higher pivot low in place that marks the line that must be broken before I’d temper my bullish enthusiasm. Until then, it’s game on for positive delta plays in CCL stock. So far, the 200-day moving average and the $20 level are putting up a fight as resistance. Watch for a clean push over $20. It will signal the next phase of the stock’s recovery has begun.
Sell Puts, Create Cash Flow
Despite the recent awakening, Carnival’s share price is still low enough to make options selling strategies like naked puts and covered calls attractive. Of the two, the naked put offers a higher return on investment due to the lower margin requirements.
If you’re willing to wager CCL will stay above $15 for the next month, or if you’re willing to obligate yourself to buy 100 shares around $14.48 if we end up falling below $15, then sell the Dec $15 put for around 52 cents.
You will pocket the $52 per contract if the put expires out-of-the-money. The initial margin required should only be approximately $150, so the strategy offers a tasty 30% return.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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