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Buy Into the Carnival Stock Weakness If You Want to Profit

The time when it required guts to bet on a bottom in cruise line stocks like Carnival (NYSE:CCL) has passed. In the first months after the novel coronavirus reached the United States, CCL stock was decimated. The unprecedented destruction of its fundamentals combined with atrocious technicals scared off all but the true believers.

Carnival cruise (CCL) ship on the water

Source: Ruth Peterkin /

Everything changed in November. Sometimes sentiment shifts are gradual. Other times they arrive instantaneously. Last month saw the latter variety.

Seemingly overnight, stock prices discounted the inevitable economic rebound from the pandemic-inspired plunge. The catalyst was Pfizer’s (NYSE:PFE) hope-inspiring vaccine. Carnival’s future was suddenly less uncertain. CCL stock gapped on the news and closed the session over 39% higher.

With that, the script has flipped. Buying dips is the new selling rips and up is the new down. Sure, the share price remains a far cry from its peak, but all that means is there is plenty of potential upside if cruising ever returns to its former glory. Even if prices only rise halfway, you are still looking at loads of profit.

Let’s take a closer look at the recent trend improvement.

All Aboard, CCL Stock Is Headed North

Carnival (CCL) stock showing nascent uptrend

Source: The thinkorswim® platform from TD Ameritrade

While we could point toward all sorts of signs that Carnival has turned a corner, the simplest and most persuasive is the change in pivot relationships. It entered November with a series of lower lows and lower highs. And now, it is exiting the month with a series of higher highs and lows. What was below all major moving averages is now above them. Pushing north of the 200-day moving average is a particularly powerful indication of bulls returning. We have not been above it since late-January.

Another development buttressing my optimistic take is the volume. Ever since the historic surge on Nov. 9, accumulation days have accompanied every upswing. Comparatively, participation during the pullbacks has been minimal. Prices rallied all last week to enter Monday with four straight up days. Not surprisingly, we are finally seeing profit-taking with a 5% hit. This is healthy, and will ultimately create a more sustainable uptrend.

If we are lucky, this one-day dip will persist for multiple sessions and create an easy buy-the-dip setup. We could retreat all the way to the rising 20-day moving average and still have a tempting pattern on our hands. Falling beneath $17 would warrant pulling in the horns. Barring that, however, and I think buyers can swing away into weakness.

Two Options Trades

In situations like this, naked puts have a lot going for them. Given Carnival’s cheap share price of $20, the margin requirement for selling puts is minimal. That, combined with the still-elevated premiums, makes for a high return on investment. With the recent trend change comes an increasingly bullish narrative that is going to make it hard for CCL stock to fall to new lows. Short sellers just got walloped and are no doubt treading with caution.

To fine-tune the entry timing, I like waiting for a break of a prior day’s high to signal the pullback that started on Monday is finished. When that time comes, consider the following plays.

The Trade: Sell the Jan $15 or $17.50 puts.

The short $15 puts offer a higher probability of profit (currently around 88%), but a lower return. Alternatively, the $17.50 puts offer a slightly lower probability of profit (currently 75%), but a tastier return.

In either case, you’ll capture the max gain if the put expires out-of-the-money. That occurs if CCL stock remains above $15 or $17.50, respectively.

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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