Carnival Cruise Lines Earnings Play!

Y’all chose bullish! Between you and I, I lean a little bullish myself. (Obligatorily, I don’t speak for anyone else at Market Rebellion.)

Anyway, I selected this trade we noticed earlier today in Carnival Cruise Lines.

It’s a debit spread that expires next Friday, June 30th, between the $17 and $17.50 strikes. That means you buy to open the $17 strike call, and buy to close the $17.50 strike call. In a debit spread, you pay a little less than you would for a standard call, but in exchange, your potential gain is capped. In this case, The $17 strike call would have cost this user $0.48 to open, however, they sold the $17.50 against it at $0.35, making the final cost $0.13, and max value of the spread $0.50. That max value will be reached if Carnival Cruise Lines expires at or above $17.50 next Friday.

Now, why would they do that? It’s easy — Carnival Cruise Lines reports earnings on June 26th. That’s right, this is an earnings trade. That means proceed with caution. That’s likely why this user opted for the debit spread — by selling an option against the long option they bought, they negate some of the potential IV crush and some of the potential theta decay. 

I’ll tell you openly that I am in a similar trade, however I opted to take the $16.00/$17.50, which cost me about $0.45 per spread, and offers a maximum value of $1.50. The risk reward is similar, though a bit lower pound for pound. That said, the break even is a bit lower too — >$16.45 vs. >$17.13 for the one bought in the UOA.

As always, it’s your call. We’re just giving you a peak at what we saw in the UOA today. I’ll tell you as well that this isn’t the first bullish spread we’ve seen bought in CCL for this earnings-inclusive expiration. Someone must really think CCL is about to report a positive surprise.

If debit spreads aren’t your style, you could consider the $16 strike June 30th which is currently $0.81. That would mean a breakeven of $16.81 – however, it would also mean paying more than either of the above spreads, and in order to get a similar pound-for-pound percentage return as the spreads above, CCL would have to travel to at least $18.45. Of course, if CCL were to travel to, say, $21, that would make this call a more profitable option than the spreads.

It’s all about risk tolerance and discipline. Do what you feel comfortable with – or do nothing at all! It’s all up to you.

Want more trade ideas like this? Of course you do! Try a month of UOA today.