Trade of the Day — BWB Put Fly

Both Royal Caribbean (RCL) and Carnival Cruise (CCL) have been the subject of bearish trading heading into CCL’s earnings, tomorrow morning. In RCL, the action was in the Sep 27 puts, which traded 26000X last Thursday (see 6/17 color). See today’s color on CCL for the bearish trading leading up to its earnings report. The industry apparently saw a slow booking period in May. The activity has been picking up a bit, but clearly cruise ship bookings are very sensitive to economic conditions. The Gulf spill doesn’t seem to have a major impact and, in fact, might help drive revenues — as consumers opt for cruises instead of beach vacations.

Nevertheless, tomorrow’s earnings from CCL should shed further light on the trends in the industry and, if the news is sufficiently bearish, it might make sense to look at a July 25 – 27 – 30 broken wing put fly on RCL, at about a 70-cent debit. In this strategy, the strategist is selling July 27 puts as the body of the fly, and buying half as many of both the 25s and 30s. It’s a broken wing fly, because the 25 and 27 strikes are two points apart, the 27 and 30s are three points wide. It’s bearish because the max profits are at $27 (-8.5 percent) at the July expiration (25 days). The breakeven is at $29.30 and, as we can see from the risk graph (below), there is no risk to the downside.


RCL finished Monday up 7 cents to $29.52, but is down 21.6 percent since late May. The stock has been trading in a range between, roughly $30.50 and $26.50, which is also around its 200-day moving average. The broken wing fly will deliver good results if it stays in that band and will generate its max profits of $2.30 (excluding commissions), if it sells at $27 at the expiration.

Category: TradeOday