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Royal Caribbean Cruises Ltd(RCL-N)

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Put Options Storm Royal Caribbean Cruises (RCL)

Barchart - Thu Jun 30, 7:15AM CDT
Travel & Leisure - stephanie-klepacki-VAqe8TwhhEI-unsplash
  • Bearish traders are targeting Royal Caribbean Cruises via unusually voluminous put options.
  • RCL stock was once a contrarian idea among bullish investors.
  • The puts are significant as it represents growing vulnerabilities in the consumer economy.

While all sectors save for a small number of fortuitously relevant companies incurred substantial losses from the initial onset of the COVID-19 crisis, few industries suffered as much as cruise ship operators. Tied to a discretionary luxury, companies like Royal Caribbean Cruises (RCL) could only watch helplessly as their market value plummeted, both from unfavorable government mandates along with consumer fears.

However, during the doldrums of 2020, some audacious contrarians would go on to generate massive profits, wagering that the bottom was in for RCL stock and its ilk. Sure enough, in the ensuing months, Royal Caribbean and its underlying sector gradually moved higher. While the circumstances at the time were still ugly, the market anticipated that at some point, society will recover from the pandemic.

Unfortunately, it appears that the honeymoon period is now over. On the June 29 session, RCL stock closed down more than 10% against the prior day’s close. Rival firm Carnival Corp (CCL) fared even worse, shedding 14% on Wednesday. Norwegian Cruise Line (NCLH) performed the best out of the major publicly traded cruise liners, declining “only” 9.3%.

Even more ominous, RCL stock was the subject of unusual options activity. Indeed, it was the most unusual for June 29 per’s screener. Here’s what to make of the negative twist in the cruise ship industry.

Put Options Put the Hammer Down on RCL Stock

While all kinds of trades occur in the derivatives market, the puts against RCL stock stand out for its sheer aggressiveness. On Wednesday, RCL closed the session at $36.02. However, the strike price for the puts is $20, meaning that traders will need to see shares decline by over 44% to be in the money.

Notable too is the expiration date of Sept. 16, 2022. While participating bears will have a little bit less than three months to see the erosion in RCL stock, this is arguably a narrow timeline for such a steep decline. Nevertheless, volume for this put option hit 29,677 contracts against an open interest reading of 213.

Finally, on an administrative note, the nominal spread between the bid and ask for the $20 puts is 2 cents. Represented as a percentage of the midpoint price of 87 cents, the spread came out to only 2.3%. One of the implications here is that this out-of-the-money put features high liquidity.

The main fear on Wall Street right now is a possibly incoming recession. Should this materialize, Morgan Stanley (MS) analyst Jamie Rollo generated headlines when outlining the worst-case scenario for Carnival: CCL stock could go to zero.

Obviously, RCL stock is tied to a different enterprise. Still, if Carnival completely collapses, there probably wouldn’t be much room for joy for Royal Caribbean.

A Warning to the Consumer Economy

Admittedly, discussing the possible implosion of a cherished industry is not exactly a heartwarming topic. Nevertheless, it’s crucial for investors to recognize potential pain points. Like a strange growth on your person, ignoring warning signals may lead to detrimental consequences later.

Regarding the put options against RCL stock, the issue isn’t just about Royal Caribbean. Up until recently, pent-up demand for memory-making experiences – colloquially known as revenge travel – suggested that consumers were ready and willing to open their wallets for cruises. However, the bearishness creeping in represents confirmation that this thesis needs a checkup.

While pilot shortages have dominated travel-related headlines in recent weeks, a lesser-known fact is that cruise ship operators are struggling to hire crew members. Given the many instances of air rage and other public-facing difficulties, it’s no surprise that fewer people are seeking careers in the broader hospitality sector.

Further, evidence is piling up that cruise liners are suffering from weak bookings, indicating that finally, the merciless rise of inflation is starting to cut into the so-called experience-based economy. As more households feel the heat, it’s reasonable to expect that segments of the consumer discretionary category will fade out as whatever remaining funds are directed to the essentials.

Just a Heads Up

None of the above information should be construed as an endorsement of the bearish trade against RCL stock. The derivative market is a zero-sum game: for you to win, someone else has to lose. In addition, the aforementioned puts have to meet certain requirements, which may or may not pan out.

Rather, I’m more interested in the broader implications of the cruise ship bears. Throughout this year, a prevailing concept existed that certain consumer discretionary segments enjoyed air pockets of demand. Cruise ships, with their ability to foster memory-making experiences, represented one such air pocket.

However, with the fierce volume of bearish trading working against RCL stock and similar names, it appears this exemption is fading away. Therefore, investors may be better served seeking a different market.

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Provided Content: Content provided by Barchart. The Globe and Mail was not involved, and material was not reviewed prior to publication.