As a rule of thumb, whenever gold prices start soaring, investors should mitigate their exposure to the consumer discretionary sector. At its core, gold is a simple commodity — yes, it’s rare and valuable and offers myriad uses. But it generates no earnings nor pays any dividends. If the news cycle is talking about the yellow metal nonstop, it probably means anxiety has gripped the economy.
Frankly, that’s the best way to describe the current juncture. Without getting into the politics, I think we can all agree that the Trump administration tariffs have unsettled global markets and commerce. Again, without getting into the merits of the high-level actions, it’s reasonable to assume that consumer discretionary businesses like Carnival (CCL) are suspect in this environment.
People need to eat and they need a roof over their heads. They don’t necessarily need to go on vacation, though it would be nice. That’s the core reason why CCL stock is a less-convincing idea at the moment.
The point isn’t really up for debate. Since the start of the year, CCL stock dropped more than 16% of equity value. In contrast, the S&P 500 — which isn’t off to an auspicious start either — is down 3.5% during the same frame. Simply, when consumers are faced with financial challenges, they batten down the hatches.
At the same time, different generations produce different mindsets among consumers. These days, an increasing number of households are prioritizing travel. Rather than the pursuit of material possessions, many folks value experiences. As McKinsey & Company mentioned last year, this experiential prioritization is prevalent even under economically fraught circumstances.
Fundamentally, then, a case exists for CCL stock to jump higher, even if only temporarily.
Unusual Options Activity Could Be Hinting at Upside for CCL Stock
On Monday, buoyant conditions in the market helped lift CCL stock, which gained nearly 5%. However, activity in the options market was unusually muted. On Monday, total options volume landed at 57,729 contracts versus an open interest reading of nearly 1.19 million contracts. However, this latest tally was 15.59% below the trailing one-month average.
Still, what was interesting was the breakdown: call volume reached 35,712 contracts against put volume of 22,017. A quick look at options flow — a screener that focuses exclusively on big block transactions likely placed by institutional investors — revealed net trade sentiment of $39,700, slightly favoring the bulls.
Notably, the two biggest bullish transactions in the options flow readout were for bought calls with strike prices of $19 and $19.50. These levels roughly correspond with prior support, possibly indicating a line in the sand. Based on the premiums paid, these high-level speculators would need CCL stock to reach around $22 to break even on these transactions.
Of course, investors aren’t involved in the Wall Street circus to lose money. It would appear that high-level speculators anticipate CCL stock to rise relatively robustly — and quickly. With earnings scheduled to be released this Friday, a strong showing could do wonders to right the ship.
To be fair, Carnival is statistically a risky idea. Based on pricing data from January 2019, CCL stock carries a negative bias. Specifically, any given long position held for eight weeks has around a 48% chance of being profitable.
However, under the dynamic conditions of extreme volatility, the forward probabilities have historically changed for the better. An eight-week long position following a double-digit-percentage loss has a 61% chance of being profitable, which is a remarkable shift.
Basically, speculators love buying the dips in CCL stock. That makes the security’s 13.4% loss two weeks ago potentially fortuitous.
Plotting a Quick Scalp
Based on prior statistical trends, the week immediately following an extreme-fear event usually leads to poor outcomes. That was the case last week as well, with CCL stock dipping slightly below parity. However, from the second week to the fifth following extreme red ink, the long odds steadily rise.
Traders can use this market intelligence to plot a compelling multi-leg options strategy. One idea is to consider the 21/22 bull call spread for the April 11 expiration date. This transaction involves buying the $21 call (at an ask of $128) and simultaneously selling the $22 call (at a bid of $79).
The idea is that credit received from the short call partially offsets the debit paid for the long call, resulting in a cash outlay of $49. This is the most that can be lost in the trade. On the other hand, the maximum reward — should CCL stock exceed the short strike price at expiration — would be $51, a payout of just over 104%.
