Carnival’s Unusually Active $27 Put Signals a Bearish Bet — Here’s How to Trade It

Heading into the final trading day of July, it looks as though we may finish the week with the S&P 500 in positive territory. Up 0.4% through the first four days, the index's futures pre-market on Friday were trading higher thanks to a big gain from Amazon after it reported strong quarterly results. 

In yesterday’s trading, the index gained back all of its losses on the week and then some with a 1.66 gain on the day, driven by investor appetite for AI and chip stocks. Whether momentum continues today could depend on the University of Michigan Consumer Sentiment Index. The July figure is expected to be revised lower from the preliminary figure of 54.4 to the final figure of 53.9. That would be up from June but down from a year ago. 

In yesterday’s options markets, volume was 62.2 million, slightly lower than the 90-day average of 63.1 million.  Calls outnumbered puts 56% to 44%. DTEs (days to expiration) of six days or more accounted for 40% of yesterday's volume, slightly higher than the norm. 

The unusual options activity was fairly muted; only one option had a Vol/OI (volume-to-open-interest) ratio over 100: Avantor’s (AVTR) Sept. 18 $14 call at 167.13. However, there were plenty with Vol/OI ratios over 25 (25, excluding Avantor). 

The stock among the 25 that’s caught my attention is Carnival's (CCL) Nov. 20 $27 put. It had a Vol/OI ratio of 33.23. Given the war in Iran and the ever-present fuel price volatility, the interest in this put makes complete sense. 

In today’s commentary, I consider some possible options strategies for Carnival stock, bullish and bearish. 

Have an excellent weekend! 

The CCL Options in Question

While the Nov. 20 $27 put was by far Carnival’s most unusually active option yesterday, it wasn’t the only one. 

Carnival had six unusually active options yesterday, split evenly between puts and calls. I will focus on the four options expiring in 114 days on Nov. 20.

Carnival's share volume yesterday was 23.7 million, 25% higher than the 30-day average, while its options volume was 70,075, 77% higher than the 30-day average. The four expiring in November accounted for 31% overall, with the $27 put doing a lot of the heavy lifting. Of the $27 puts’ 14,221 volume, three trades accounted for 99.8% of that volume. 

As you can see from the trades, they were all either at the ask or within pennies. This suggests a bearish view on the stock. The Barchart Technical Opinion’s 40% Sell rating confirms this bias. 

Clearly, these three trades were made to either provide downside protection for existing shares held or a bet that the stock will once again test its 52-week low of $23.49 in the coming months. 

I’ll examine both the long put options strategy and possible multi-leg alternatives from yesterday’s six unusually active options. 

The Carnival Long Put Options Strategy

In addition to the $27 put expiring on Nov. 20, there was a $26 put. 

The net debit of the $27 put at the close was $258, slightly higher than what the traders/investors paid for the three large Nov. 20 $27 puts yesterday at 1:23 p.m. ET. The likelihood of Carnival’s share price being below $24.42 at expiration is 31.84%, 270 basis points higher than the $26 put. 

So, it boils down to whether you are willing to spend an extra $44 in cost [$258 net debit - $214 net debit] for a slightly higher profit probability of 31.84%. The answer based on yesterday’s volume would seem to be a resounding yes. 

The expected move by Nov. 20 is 17.88%, which suggests the compromise makes sense. Here’s the profit/loss chart for the $27 put. 

The CCL Bear Put Spread

The most obvious multi-leg options strategy would be a Bear Put Spread, which is a bearish bet that Carnival’s share price will fall by expiration. It involves buying a long put and selling a lower-priced put for income. 

The images below are the highest profit probabilities for the $26 and $27 Nov. 20 puts. 

As you can see, the bull put spread reduces the cost of the bearish bet from $214 for the long $26 put to $49. That’s a significant 77% drop. Meanwhile, the cost of the bearish bet is reduced by 79% from $258 to $55 for the long $27 put. 

The cost savings don’t come for nothing. In return for lowering your cost, you’ve capped your gains at $51 for the $26 put and $45 for the $27 put. 

Here’s the $27 profit/loss diagram. 

As you can see in the $27 bull put spread diagram above, the green profit section plateaus at $45, whereas in the diagram pictured earlier for the $27 long put, the maximum profit is unlimited. Of course, you are spending more for this opportunity. 

The CCL Long Strangle

The Long Strangle expects volatility of CCL stock to increase by expiration in November, resulting in a big move in its share price in either direction. It is not a bullish or bearish bet, but rather a directional one. 

I’ve selected the two long strangles with the highest profit probability at 40.2%. In these two strangles, you’re buying a long $27 put and either a $28 or $30 call. The net debits are $558 and $477, respectively. 

While you have to pay $81 more for the $28 call, you get breakeven points for both the upside and downside that are both about 22% higher or lower than the current share price. That, to me, makes it a better bet than the $30 call, where the 26% upside in a bearish downtrend seems hopeless to hit by expiration.

I haven’t included any long strangle examples for the $26 put because the profit probability is slightly lower than the $27 put. I also haven’t considered the short strangle, which expects the volatility to decrease and the share price to trade in a certain range, because the trader/investor making the three Nov. 20 $27 put buys yesterday was bearish about Carnival’s share price direction.  

As for Carnival stock, I favour Royal Caribbean Cruises (RCL), primarily because it has significantly outperformed its peers post-COVID, and likely will continue to do so.