Carnival Corp. (NYSE: CCL) shares are falling after company CEO Mickey Arison said at an annual shareholders meeting that the company will pay an extra $600 million this year for fuel. He also added that the recently-increased $7-a-day fuel charge the company charges its passengers will only pay 25 to 40 percent of those costs. The June crude oil contract is also near record levels again today, and is currently at $118, which is not helping CCL. If you think this stock won't be rising too far in the coming months, then it could be a good time to look at a bearish hedged play on CCL.
After hitting a one-year high of $52.10 in October, the stock hit a one-year low of $36.10 in March. This morning, CCL opened at $39.29. So far today the stock has hit a low of $38.95 and a high of $39.81. As of 12:55, CCL is trading at $39.12, down $1.19 (-3.0%). The chart for CCL looks deteriorating slightly, while S&P gives the stock a neutral 3 STARS (out of 5) hold rating.
For a bearish hedged play on this stock, I would consider a June bear-call credit spread above the $45 range. A bear-call credit spread is an options position that combines the purchase and sale of call options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make an 8.7% return in two months as long as CCL is below $45 at June expiration. Carnival would have to rise by more than 15% before we would start to lose money. Learn more about this type of trade here.
CCL hasn't been above $45 since December and has shown resistance around $42.50 recently. This trade could be risky if the company's earnings (due out in mid-June) are a positive surprise, but even if that happens, this position could be protected by the high cost of fuel, which should weigh down this stock.
Brent Archer is an options analyst and writer at Investors Observer.
DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent neither owns nor controls positions in CCL.
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Reader Comments (Page 1 of 1)
5-04-2008 @ 11:04PM
John Borsi said...
Dear Mr. Arison,
Sorry to hear about the fuel costs, just hope the company can sustain this increase. Just to let you know, I just experienced my first cruise ever at 39 on Carnival, and it was the best vacation of my life! Understand that the price if fuel is hurting everyone, but the joy I feel about planning my next cruise gets me through the work week every week! So, wanted to provide you with some feedback that it is all worth while, higher cost to passengers and all.
I also wanted to say that I was on the Conquest and met Greg Ray, the comedian, and he enriched my wife and my trip ten fold. We loved his "clean" sense of humor and were sad to learn that we saw his last performance with Carnival...My wife and I are now freinds with Mr. Ray and keep in touch because he is such a genuine person. Not willing to compromise his quality performance just to please the corperation. In fact, many of the passagers I made friends with while on-board were very pleased to know that they could attend a comedy show without all of the profanity. I think losing a talent like Greg Ray is a tremendous loss for Carnival and should be reconsidered. Although it appears that passengers do like the comedy with more profanity, it is actually the opposite. It will not be the same on my next cruise without Mr. Ray. He made life long memories for my wife and I as well as became a life long freind as well. I feel that bringing him back would be better for your company in these difficult times because the younger croud will not be able to sustain higher prices like us more established stable customers. It is the younger crowds that like the profanity, but it is NOT the younger crowd that will be able to afford to cruise with the new fuel price increases...
Will welcome your reply or you informing me about who to contact about this matter...
Sincerely,
John and Shelley Borsi
512-627-3515