Tuesday, April 28, 2015

CCL Analysis

The nautical cruise company Carnival Corp. (CCL), headquartered in Miami, Florida, broke below its 20-day price channel on Monday, producing a bear signal and confirming it the next day by trading still lower.

I shall use the regular monthly MAY series of options, which trades for the last time 17 days hence, on May 15. CCL has no Weeklys.

The goal of my trades is to construct direction-neutral positions with a zone of profitability at expiration covering all of the one standard deviation range implied by volatility and options pricing, or the 30-day hourly chart support and resistance range, whichever is wider.

CCL's bear signals have a success rate of 33.3% over the past year -- one trade made a profit and two produced losses.  With that record, CCL is a candidate for a non-directional trade. The winning trade produced a 3.2% profit, and the lower a 3.5% loss.

[CCL in Wikipedia]



Click on chart to enlarge.
CCL at 12:40 p.m. New York time, 30 days hourly bars
Implied volatility stands at 21.4%, which is 1.6 times the VIX, a measure of volatility of the S&P 500 index. CCL’s volatility stands in the 12th percentile of its most recent rise.

Ranges implied by options and the chart
WeekSD1 68.2%SD2 95%Chart
Implied volatility 1 and 2 standard deviations; chart support and resistance

The Trade

I've trimmed the profit zone at the top of the one standard deviation range while retaining profitability down through the lower boundary of the range. Although the historical odds of success argue for a direction neutral approach, the bear signal creates a bias to the downside.

Iron condor short the $46 calls and long the $47 calls,
short the $43 puts and long the $42 puts
sold for a credit and expiring May 16
Probability of expiring out-of-the-money


The risk/reward ratio stands at 1.7:1.

Decision for My Account

The prosposed CCL trade carries three risks.

One is time. There are no Weeklys in CCL's options inventory, and so it shall require 17 days to realize full profitability.

Another is the risk of continued decline. Although the historical odds are in favor of a failed bear signal, they also allow for the possibility of a successful bear movement, rendering a non-directional trade non-profitable.

Implied volatility is higher than the VIX, but low by historical standards. The present level was last seen in September 2014. For these trades I count on falling volatility to help quick profit. That help, it seems likely, will be unavailable here.

Another consideration is simply putting money where it has the best chance of turning a profit. We're in the midst of earnings season, Do I tie-up funds for this trade, exposing it those risks, or to trades coinciding with earnings announcements, where time and implied volatility are favorable and where there is no directional signal creating a bias?

All in all, I find the proposed trade above to be reasonable, but with higher risks that I'm unwilling to take while I have alternatives. A similar trade outside of earnings season, when trades are less plentiful, might leave me willing to take the greater risk.

I am passing on CCL today. No trade.

-- Tim Bovee, Portland, Oregon, April 28, 2015


My volatility trading rules can be read here.


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Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

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Based on a work at www.timbovee.com.

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