Royal Caribbean (NYSE:RCL) investor rolls down a bearish bet


Royal Caribbean Cruises Ltd. Co. (NYSE: RCL ) shares are bucking the broad-market weakness today and moving higher. With one hour left to go in the trading day, the shares were up more than 2%. Oddly enough, there does not seem to be any concrete catalyst for the outperformance. Rather, there just seems to be more buyers than sellers. The company has not announced its next earnings release date, but the market expects the report around July 29. Put volume is active in the September expiration month thanks to an investor who appears to be selling some in the money puts to take profits, and buying some out-of-the-money puts.

At 10:50 a.m. EST, 15,000 September 31 puts changed hands simultaneously with 25,000 September 20 puts. The 31 puts crossed the tape for $8.80 per contract while the September 20 puts changed hands for $1.80 per contract. Given that the open interest in the 31 strike puts is more than 16,000 contracts, it is quite possible that this trader is taking profits in the 31 strike puts by selling them to close, and reinvesting some but not all of the proceeds in the 20 strike. Looking at the price action in the shares, we see that the stock has dropped more than 20% from the 30-level in just over a week. That has resulted in a sharp increase in the price of the 31 puts.

A closer look at time and sales shows this investor traded stock at the same time as the options trade, which turns this directional options bet into a delta-neutral volatility play. Around the same time that the options hit the tape, a block of 580,000 RCL shares changed hands for $22.40. This stock action translates to the number of shares market makers would have to sell to make this a delta neutral play. The $1.80-premium of the 20 puts with the stock trading around $22.40 equates to an implied volatility level of 70%. This implied volatility level compares to the stock's 30-day historical volatility of 62%. If this investor thinks that RCL will become more volatile, then buying the 20 puts on an implied volatility of around 70% will make money for the investor if they are hedged daily until expiration.

The graph below illustrates the profit/loss profile of this trade tied to a stock position. You can build your own visuals by opening a free virtual trading account today - I use the trading tools available to account holders each day to assess and manage risk in stock and option trades.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Options

Referenced Stocks: RCL

Jud Pyle

Jud Pyle

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