How to Trade Carnival Into Earnings

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Carnival (NYSE:CCL) shares are sinking ahead of Thursday morning’s earnings report. The weakness is particularly unnerving given the continued ramp in small-caps and other industries sensitive to the “reopening trade.” If traders feel confident enough to keep bidding restaurants and retail to the moon, why not cruise lines like CCL stock?

Carnival cruise (CCL) ship on the water
Source: Ruth Peterkin / Shutterstock.com

The obvious answer is that the road to recovery for cruises will be far bumpier than other industries. And if you think the Street is overly pessimistic about Carnival’s prospects, then step right up and buy because you’re getting a hefty discount.

You can even elevate your odds of success by tapping into the power of options contracts. I’ll show you how down below. But first, let’s see what traders are baking in for this week’s earnings report.

Forget the Report

Normally, traders would be gearing up for a modest jump in either direction following Thursday’s release — but these are far from normal times. Take a look at how the stock responded to the last three quarters’ earnings announcements. Notice a theme? Prices didn’t budge, despite the atrocious numbers.

The reason is simple. Wall Street already killed CCL stock in March. The harrowing 90% haircut priced in Armageddon and then some.

What was once a large earnings-driven move is now a daily occurrence.

Here’s another way to illustrate traders’ lack of concern: the implied volatility. In normal times, uncertainty ramps up into these quarterly rituals. It’s a byproduct of investors bidding up the price of options to prepare a big price move in the stock. However, if you look at Carnival’s implied volatility this go around, you’ll notice there hasn’t been any increase at all. Instead, it’s drifting near the 17th percentile — its lowest level since last January.

If we assume earnings will be a non-event, then building a trade on CCL ultimately comes down to our directional bias. And determining that is solely a function of the price chart.

CCL Stock Chart

Carnival (CCL) stock chart with pullback to 50-day moving average
Source: The thinkorswim® platform from TD Ameritrade

Since peaking on Dec. 9 at $24.38, CCL has declined 18.4%, breaking its 20-day moving average in the process. The current test of the 50-day moving average and old resistance in the $20 zone is important. For the intermediate uptrend and general bullish sentiment surrounding the recovery to hold, bulls need to defend this level.

That said, we spent months carving out a sideways base between $12 and $18, so I would assume we find other support zones on a probe lower. The consensus is that Carnival will eventually recover. It’s just going to require patience for those bottom fishing down here.

To get paid while waiting, I highly recommend coupling a stock purchase with selling covered calls or selling puts as an alternative.

Short Puts Beckon

If you think the current pullback is a buy and that CCL stock will skate through earnings with its overall uptrend intact, then consider selling naked puts.

The Trade: Sell the February $17.50 puts for around 80 cents.

By shorting the put, you are obligating yourself to buy 100 shares per contract at an effective purchase price of $16.70. That’s near the 200-day moving average and may not be a bad entry price for a longer-term bullish position. If assigned, you could also sell covered calls to reduce your cost basis further.

On the other hand, if Carnival shares sit above $17.50 at expiration, the put will expire worthless, allowing you to pocket the initial 80 cents.

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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Article printed from InvestorPlace Media, https://investorplace.com/2021/01/how-to-trade-carnival-ccl-stock-into-earnings/.

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