Quarterly earnings have come and gone for Carnival Corp (NYSE:CCL). The numbers were as bad as you’d expect for this stage of the economic recovery. CCL stock has fallen slightly in the week following the report and now finds itself knee-deep in a sloppy range.
While the messiness makes directional plays tricky, spectators willing to tap into the power of options contracts can build a compelling cash flow trade.
After the usual stroll through Carnival’s weekly and daily price charts, I’ll reveal the mechanics behind the play. Here’s the teaser – it provides a 70% chance of capturing a nearly 30% return over the next month.
CCL Stock Charts
Entering bullish leaning trades is always easier when the price trend backs you up.
Given the turnabout in cruise line stocks accompanying the general recovery in risk assets since last March, the weekly time frame for CCL looks kindly on today’s trade idea.
Carnival spent virtually all of 2020 floundering in a range. Sellers had already depressed prices so much that there really wasn’t much downside left. On the other hand, buyers didn’t really warm up to bottom fishing until Pfizer’s (NYSE:PFE) game-changing vaccine news arrived last November.
The weekly trend finally broke out of critical resistance ($24) in February. With the break, chart watchers no longer had an excuse not to participate. Since then, prices have continued pushing higher, albeit in a stairstep fashion.
Fast forward to today, and $30 is the new $24. We’re starting to consolidate beneath this secondary ceiling creating the multi-week consolidation zone that defines Carnival’s recent price action. Moving averages confirm the path of least resistance is higher. Both the 20-week and 50-week averages are climbing. Notably, this is the first time the 20-week has been above the 50-week since early-2018. Said another way, the trend structure of CCL stock is healthier now than it’s been at any time since the peak.
The daily view creates a clearer picture of the consolidation zone carved out over the past six weeks. The silver lining of such a range is it makes the boundaries to trade against obvious. On the top side, $30 has rejected the past three advances. The latest attempt came following earnings and proved that the numbers weren’t good enough to bring enough buyers to the yard. Fortunately, we’ve seen three successful defenses of the lower end of the range at $24.
It’s no coincidence that a new floor has formed at this specific price zone. It’s a great example of a simple principle they teach in technical analysis kindergarten: old resistance often becomes new support.
Embrace the Chop with Naked Puts
The weekly uptrend has me pointing overall bullish, but the daily trading range suggests short-term neutrality. Couple that with CCL stock’s low price tag and naked puts look attractive.
Selling puts is a trade that profits if a stock rises, stagnates, or even falls slightly. The idea is to sell a contract that we expect to expire worthless. If it does, you pocket whatever premium you were paid at trade entry. Typically we sell a one-month option or shorter because of the higher rate of time decay.
If you’re willing to wager that CCL sits above $25 at May expiration, then sell the May $25 put for around 85 cents.
The stock is slipping today, so if you want to wait for confirmation that prices are moving in the right direction, consider using a break of this morning’s high ($28.20).
To minimize the risk if CCL stock breaks the low end of its range, exit the trade if prices fall below $24.
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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