Options Traders Expect High Volatility for Norwegian Cruise Line (NCLH)

Undoubtedly, when the COVID-19 crisis first capsized the global economy, the cruise liner industry represented one of the worst-hit sectors. With images of stranded passengers waiting for rescue hitting the airwaves and generating macabre headlines, few wanted to be involved in the space. Not surprisingly, companies like Norwegian Cruise Line (NCLH) suffered heavily from the debacle. Even now, after much of the pandemic fears have faded, NCLH stock remains below its pre-COVID price level.

On some level, though, the devastation in Norwegian Cruise and its ilk presented a contrarian upside opportunity. After all, cruises offer significant bang for the buck in terms of traveling-related experiences. Once the awful memories of the pandemic slips into the rearview mirror, travelers should come pouring in, the underlying thesis reasoned. Compared to the spring doldrums of 2020, NCLH stock has improved noticeably.

Nevertheless, since June of last year, Norwegian failed to capitalize on the revenge travel phenomenon; that is, after roughly two years of lockdowns and various pandemic mitigation measures, consumers simply wanted to get out of the house. Digital means of entertainment such as streaming services faded while companies that facilitated real experiences blossomed. Sadly, though, NCLH stock didn’t really enjoy much of a sustained comeback based on this dynamic.

Currently, shares are stuck in an awkward position. On one hand, NCLH stock suffered a year-to-date loss of over 24%, reflecting deep pessimism. Adding to the pressure are macroeconomic forces, such as Federal Reserve policies that could slow down business activity. But on the other hand, shares gained over 47% in the trailing month.

Which side of the fence will dominate proceedings for Norwegian? Options traders don’t know – and with their straddle on NCLH stock, they don’t have to.

Straddling NCLH Stock for Profits

Following the ringing of the closing bell for the Nov. 1 session, Norwegian represented one of the highlights regarding unusual options activity. Specifically, it appears that traders are applying a straddle on NCLH stock, which involves simultaneously acquiring puts and calls on the same underlying security, at identical strike prices and expiration dates.

Although you can find extensive literature on straddles and other options strategies, the main point here is that this approach is essentially directionally neutral. Indeed, a major risk with straddles is that the underlying security doesn’t move. Instead, traders desire for the target stock to move in either the bullish or bearish direction with great gusto.

For NCLH stock, traders targeted calls and puts with a strike price of $17.50 and an expiration date of Nov. 4 – this coming Friday. Interestingly, Norwegian rival Royal Caribbean Cruises (RCL) will release its third-quarter earnings report on the morning of Nov. 3, whereas Norwegian itself will release its Q3 report on Nov. 8.

For the aforementioned call, the contract featured an ask of $1.00. Regarding the put, the ask came out to 30 cents. Adding the two, the total outlay or premium paid is $1.30. From there, divide this figure by the strike price ($17.50) to calculate how much the underlying security must move (7.43%) to break even on the transaction.

Given the dramatic upside in the trailing month, it’s very possible that NCLH stock could move substantially, depending on the outcome of Royal’s Q3 earnings report. While it’s not Norwegian-specific, it’s almost certain that the cruise ship industry will trade in sympathy with whatever Royal discloses.

To be clear, options can be tricky, especially for folks new to the game. However, what does work in NCLH traders’ favor is that the market is hungry for news. This kind of emotion can yield dramatic mood swings, thus bolstering the potential profitability of the straddle.

A Reasonable High-Risk Wager

To be quite blunt, it’s going to be difficult to decipher what Royal has in store for investors ahead of time. It’s possible that thanks to the relative strength of the U.S. dollar, travelers flocked to take international cruises. At the same time, the Fed’s pivot to a hawkish monetary policy raised borrowing costs, thus reducing spending sentiments.

As well, if the Fed continues to unwind its balance sheet expansion – effectively reducing the money supply – this will create a dynamic of fewer dollars chasing after more goods. In turn, this environment will disincentivize spending as sitting on cash would yield an increase in purchasing power. That’s great for financial responsibility; not so great for discretionary-spending-dependent investments like NCLH stock.

Therefore, it’s anyone’s guess what the major cruise ship operators will deliver for their Q3 earnings results. However, it’s likely that Wall Street will react strongly to the announcement. Ultimately, then, for hardened but astute speculators, straddles make a lot of sense for NCLH stock.

• Stocks Fade Ahead of Wednesday’s Expected 75 bp Fed Rate Hike
• Brunswick Strikes Gold Down in Florida
• Meta Platforms (META) Bulls Attract the Spotlight of Unusual Options Activity
• Chevron's Massive Free Cash Flow Powers the Stock Higher