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Carnival Corporation's Shares Plummet, Yet Call Activity Spikes

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CCL short sellers could be hedging their positions against a potential rebound.

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Carnival Corporation (NYSE:CCL) disclosed a 30% drop in third-quarter profit yesterday morning, spurring a slew of brokerage firms to downwardly adjust their positions on the stock. As such, CCL shares have plummeted nearly 13% since Monday's close, and are now lingering around annual-low territory at $32.67. Meanwhile, CCL's total options volume is up more than eight times its intraday norm, with calls nearly doubling puts.

Taking center stage is the October 34 call, where more than 7,000 contracts have crossed the tape for a volume-weighted average price (VWAP) of $0.44. More than three-fourths of the contracts went off at the ask price, suggesting they were purchased. Furthermore, at the strike, implied volatility has increased, and volume exceeds the open interest level -- collectively pointing to activity of the buy-to-open sort.

Today's call buyers may have purchased these now out-of-the-money options in hopes that CCL will rebound over the next three-plus weeks, toppling the breakeven price of $34.44 (strike plus the VWAP) by October expiration. However, considering short interest on CCL grew 19.5% during the last two reporting periods, and would now take more than a week to cover, at the stock's average pace of trading, it is also possible that the call buyers are actually short sellers in disguise, looking to hedge their bearish bets.

Regardless of their incentive, the most today's call buyers risk losing is the initial cash outlay, should CCL remain below the 34 strike through expiration. In this respect, now is an opportune time to pick up options-related insurance, as this call's implied volatility of 25.40% sits well below CCL's 20-day historical (realized) volatility of 32.06% -- which means the aforementioned premium is relatively inexpensive.

From a broader technical standpoint, Carnival Corporation has performed poorly over the past year, amid a number of highly publicized woes. In fact, its shares have fallen roughly 11%, and have underperformed the broader S&P 500 (INDEXSP:.INX) by almost 30 percentage points.

This article by Milissa Hudepohl was originally published on Schaeffer's Investment Research.

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