Both Wall Street and Quant Indicators Point to an October Rally in Carnival Stock

Cruise ship giant Carnival (CCL) hasn’t enjoyed a strong performance recently and for good reason. With global economic headwinds and rising fuel cost concerns representing key barriers, investors took the safe road out and trimmed their exposure to CCL stock. That’s fine but there’s both a fundamental and quantitative signal that suggests a turnaround could be possible in October.

According to Google Finance’s summary sheet, while Carnival delivered a solid second-quarter earnings print, escalating geopolitical crises have caused significant investor jitters. Over the trailing month, CCL stock has slipped more than 5%, contributing to a year-to-date loss of nearly 16%. Subsequently, the Barchart Technical Opinion indicator rates the ticker as a 56% Sell.

However, investors may be determined to end Carnival stock on a high note this year. Fundamentally, Google Finance notes that for the next quarter, “market consensus suggests a strong seasonal performance supported by robust booking demand and solid EBITDA guidance.”

That might not just be empty words. Barchart’s volatility skew for the Oct. 2 options chain reveals a protective “smile” posture, but one that leans toward out-the-money (OTM) put-side protection, suggesting concerns about sharp volatility in Carnival stock. However, the Oct. 16 skew — while also demonstrating a smile — leans slightly more to OTM calls.

In other words, while traders are still concerned about downside risks in CCL stock, they also recognize that the ticker could swing dramatically higher. And that’s possibly evidenced by the market consensus for strong seasonal demand. It’s also interesting that the next earnings date is scheduled for Oct. 5.

One possible interpretation is that the market is waiting for the weak hands to fully exit themselves from Carnival stock. If that happens — and if Carnival can deliver the goods in Q3 — CCL could be on its way to posting a recovery in October.

Challenging the Assumptions Baked into CCL Stock Option Pricing

Given the possible recovery of CCL stock, I’m looking at the 27/28 bull call spread expiring Oct. 16. It’s intriguing because of the low net debit per spread, which comes in at $46. Should CCL rise through the $28 second-leg strike at expiration, the maximum profit would be $54, a payout of 117.39% at time of writing.

However, there is a problem with this trade: it has low odds of success. In particular, the breakeven price is listed at $27.46, which is almost 7% higher than Monday’s close of $25.71. It should be noted that the implied volatility (IV) for the Oct. 16 options chain stands at 45.28%, which is higher than the historic volatility of 35.96% — almost certainly due to the Q3 earnings buzz.

Still, even with that anticipation, the probability of profit (breakeven) is defined as 35.1%. Further, if we reverse-engineer Barchart’s Expected Move calculator, the probability of reaching $28 at expiration is only 29.49%. Unless you have a very compelling reason to bet on Carnival stock, from a sheer odds perspective, the above call spread is difficult to justify.

So, why bother talking about it? The nuance is that, like any other model about the unknown future, the above probabilities are based on presuppositions. We just don’t know the future until the future materializes. There’s no right or wrong here but only which model or framework you find convincing.

Frankly, I’m not convinced by these raw probabilities because they’re built on an assumption — that CCL stock will undergo a random walk (with the current IV providing the constant “fuel”) from here to the expiration date. Yes, under this risk-neutral framework, the odds would indeed be very low that the 27/28 call spread will be profitable.

However, I don’t think that Carnival stock will undergo a random walk because it has suffered — from a quantitative view — an extended downturn. With the bulls anticipating a strong Q3 print, it doesn’t seem likely that CCL will trade randomly. Instead, I believe it will trade nonrandomly.

We’ve Seen This Pattern Before

A key reason why I’m excited about CCL stock at this juncture is that we’ve seen this pattern before. In the last 10 weeks, Carnival has only printed two positive weekly candlesticks. Under a conventional view, this 2-8-D quant sequence (2 up, 8 down, downward slope) would be considered bearish. But that’s a present-moment perception. We should be concerned about the forward-looking response.

And just what is that response? When we look at the historical data for CCL stock going back to January 2019, whenever the 2-8-D signal has flashed on the charts, Carnival has cleared the equivalent of the $28 strike price a total of nine times at the end of the eighth week. Granted, the number of times that the signal has flashed is only 15. Still, from a conditioned, observational standpoint, the hit rate at $28 on Oct. 16 would be expected to be 60%.

Again, the extremely small sample size means that the above observation is statistically a low-confidence affair. Nevertheless, if we were to grant the inductive inference, there’s a solid possibility that Carnival stock could trigger the second-leg strike price at expiration. That’s why the 27/28 bull spread may be one of the ideas to consider as Carnival’s Q3 disclosure date approaches.