The recovery attempt that began for Carnival Corp (NYSE:CCL) in late-2020 has continued through the first quarter of 2021. At nearly $27, CCL stock’s year-to-day gain stands at 24%, heading into Wednesday’s earnings report.
The quarterly announcement will provide another round of numbers for investors to digest, but if the options market is any indication, they aren’t concerned one bit.
Perhaps it’s because the price chart finds itself on such solid footing. Or maybe, it’s due to the stimulus-fueled optimism permeating the Street these days. The S&P 500 just eclipsed 4,000 for the first time in its history, and the Nasdaq is finally starting to participate in the upside after weeks of chop.
Whatever the reason, demand for options contracts ahead of the report pales compared to the drama that’s played out over the past year. Let’s take a closer look at the behavior of implied volatility.
Fear Has Left the Building
Implied volatility measures demand for stock options. When the masses are clamoring for calls and puts, the premium (or prices paid for the options) increases. In turn, implied volatility rises to reflect that the stock now has to be more volatile to justify what traders are paying.
The link works the same way when demand falls. Premiums shrink and implied volatility tumbles. In the usual earnings cycle, demand for derivatives increases ahead of the event. Said another way, uncertainty is usually highest each quarter right before the earnings report. This is because of the history that many stocks have of creating large gaps in response to the news.
What’s interesting about Carnival’s behavior this go-around is that we haven’t seen any bid in implied volatility whatsoever. At 65%, CCL stock has officially fallen to its lowest level of the past year. Far from fearing this quarter’s report, investors seem to be shrugging. Compared to the gauntlet they just lived through, this event is anticipated to be a nothing burger.
Using the value of the options that expire next Fridy, April 9, we can determine the expected move. The front-week straddles are pricing in a move of $1.73 over the five trading sessions. That translates into a move of 6.4%. Based on how much volatility we’ve seen recently, it doesn’t seem like that big of a move. For me, that rules out short volatility strategies like an iron condor or short strangle.
Before pinning down a particular play, let’s consider the price chart.
CCL Stock Chart
The most important milestone for Carnival was climbing above $24. Doing so completed the nine-month ascending triangle pattern that defined its bottoming process following March’s massacre. The plunge from $40 to the single digits was so swift that it left zero pivots in its wake. As a result, there aren’t any major resistance zones between $24 and $40. That gives CCL plenty of room to recover if the breakout was legit (I think it was).
Drilling into the daily reveals a fair bit of chop transpiring over the past two months. Based on this week’s rebound, CCL stock now sits in the dead center of the range, which really makes it difficult to have a strong directional opinion. If we tested support at $24 or pushed into resistance at $30, we could make a case for a bounce or breakout.
In the absence of a clear entry point on the daily, I suggest deferring to the overall uptrend as your guide. The path of least resistance is higher, and any post-earnings selloff is likely to be short-lived. Because of the lower implied volatility rank, I suggest buying call spreads.
The Trade: Buy the May $25/$30 bull call for around $2.10.
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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