Buy August 32 Straddles in CCL ahead of RCL Earnings

by Philip on July 25, 2012

in Trading

RCL 2Q Earnings Volatility Preview: Royal Caribbean (RCL) is scheduled to report 2Q12 financial results tomorrow morning before the market opens. August at-the-money options in RCL appear to be on the cheaper side heading into earnings. Using yesterday’s closing prices, at-the-money options are implying a 4.3% earnings related move, below its average historical earnings move of +/-7.2%. A summary of recent RCL earnings moves is included below:

 RCL CCL Options

 

RCL/CCL Earnings Volatility Comparison: While RCL options appear attractive ahead of earnings, industry peer Carnival Corporation (CCL) may be the better play. CCL has averaged a +/-3.2% move over RCL’s last eight earnings announcements. The 3.2% average move is roughly in line with the earnings volatility CCL has averaged over its earnings announcements. August options in CCL do not seem to reflect “RCL earnings volatility,” with August at-the-money options trading below both September and January options on a volatility basis and in the 22nd percentile of 52-week vol rankings.

Buy August 32 Straddles in CCL: Using yesterday’s closing prices, the August 32 straddle in CCL could be purchased for $1.80 with breakeven levels of $30.20 (-5.3%) on the downside and $33.80 (+5.9%) on the upside.

Recent Options Trading: Over the last month, we’ve highlighted the same type of trading in RCL and CCL, with investors implementing a long RCL / short CCL trade using options. Yesterday, the trend continued, with investors selling 9k September 24 puts in RCL, as well as selling 6700 September 32 calls in CCL. Other notable trading activity in the cruise lines from yesterday included buyers of August 32-31 1×2 put spreads in CCL.

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