Carnival Corp. Is Taking On Water

Chinese stocks growled their way into a bear market overnight, taking the Shanghai Composite’s loss since a January high to 20% and wiping out $1.8T in market value. Investors have largely ignored government measures to support market sentiment, including a weekend bank reserve-ratio cut, as trade tensions add concerns about Beijing’s deleveraging campaign and weaker-than-expected economic data.

The market continues to exhibit weakness across the board.  Let’s consider Carnival Corp. (ticker: CCL)

Strategy Discussion

If one was strictly a stock trader, selling (shorting) CCL in the $57.75 area could be prudent.  You are anticipating a move to the downside.  As a protective measure, it is always good practice to place a buy-stop order.  In this case, placing that order in the $62.00 area will mitigate potential losses.

For active traders with a shorter investment time horizon, you can consider a setup utilizing options. Given the market conditions outlined above, taking an active, premium debit approach may be the best path to success.

Because of the reasons given above, the purchase of a debit put spread may be one way to approach this situation.  The first order of business is to calculate your target strike.  In order to perform this calculation you need three pieces of data:  last trade price, options expiration date and implied volatility for that expiration date.  This calculation for CCL yields a target price of approximately $56.00.  You may want to consider the CCL July 13th weekly expiration 56/57 put spread, buying it for $0.25.  The most you can lose is the debit paid and the most you can profit is the width of the spread less any premium paid.  Max risk = $0.25 and max reward = $0.75.  This means that you are getting odds of 3:1.

Given the trading and market environment outlined above, a trader must evaluate whether this reward/risk ratio is appropriate for his/her risk tolerance.