RCL Buoyed in a Range

I am making a bet that Royal Caribbean Cruises will remain docked below $41 but stay afloat above $35.
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Royal Caribbean Cruises

(RCL) - Get Report

is trading $39.83 with 30-day implied volatility of 1.3% as of ~9:45 a.m. EDT. The Livevol Pro Summary is included below.

The company had a great earnings report a few days ago. A snippet from the

South Florida Business Journal

reads:

" The company expects record earnings per share next year. The news, which sent its stock sharply higher, came in a third quarter earnings report that saw profits rise 55 percent to $356.8 million, or $1.64 a share. The Miami-based company earned $230.4 million, or $1.07 a share, in the year-ago quarter."

The Livevol Pro Charts Tab is included below. The top portion is the stock price, the bottom portion is the volatility where 30-day implied volatility is red, 20-day historical volatility is blue and 180-day historical volatility is pink.

Royal Caribbean Cruises (RCL) Volatility

Source: Livevol

View Chart

Two things to note:

1. The stock gap on earnings.

2. The relatively depressed level of 30-day implied volatility right now.

The stock moved up to an annual high, just below $41.00. As is often the case with such an abrupt move, the stock has retraced a couple bucks. I want to make a bet that the stock can drop a bit further, but still remain comfortably above the $35.00 level (where it was the day before earnings). Though volatility is low, I think the downside risk is limited and I am willing to sell some premium.

Let's look to the Options Tab, then make a trade.

Trades: Buy to open 1 RCL November 37 put for $0.55 and sell to open 2 RCL November 36 puts at $0.36.

This yields a net credit of $0.17. It has maximum gain if RCL dips to $36.00. It starts to lose money if RCL dips below $34.83 and is naked downside.

At the time of publication, Ophir Gottlieb held no positions in the stocks or issues mentioned.

Ophir Gottlieb is managing director and head of client services and algorithmic trading at the financial data services company Livevol. He has worked as an equity option market maker and prop trader on the NYSE ARCA exchange floor since February 2008. Prior to working on the exchange floor, he worked as a structurer on the Countrywide trading desk and before that as the director of client services and research for the quant modeling firm Audit Integrity.

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