There’s Still Plenty Of Upside In This “Return To Normal” Trade…
The economy seems to be recovering. This is shown in the chart of the CNN Back-to-Normal Index, which has been near its current level of 92% since June. The index ranges from zero, representing no economic activity, to 100%, representing the economy returning to its pre-pandemic level in March 2020.
Source: CNN.com
This high reading seems counterintuitive based on the headlines. Covid is still in the news, 18 months after it changed all of our lives. But there is considerable progress in the battle against the virus.
Source: NYTimes.com
That map with so many red spots may not seem like good news, but the number of hot spots is decreasing and the pace of vaccinations is increasing.
Source: Bloomberg
Bloomberg estimates that the United States will be on the path to immunity within three months. So the data does show that a return to normal is likely very close.
How We Can Trade This
This is good news for all of us, of course. But it’s especially good news for companies that will benefit from a “return to normal,” like Carnival Corporation (NYSE: CCL).
Carnival recently announced that more of its ships will be returning to operations by the end of February, which means that about 90% of the company’s U.S.-based capacity will be back on line.
Carnival’s president noted that, “Our restart plan continues to excel across all metrics, and we are looking forward to completing the restart of the fleet in the new year.” She also noted, “We are optimistic that vaccines will be approved for children between the ages of 5-11 before the end of the year and we look forward to welcoming more families back on board.” Carnival is currently operating with vaccinated cruises under its current safety protocols.
Carnival was among the hardest hit stocks in the pandemic.
The stock appears to be on the path to recovery, and the path seems sustainable. We didn’t see a large jump in the stock price as investors became overexcited about Carnival’s prospects. The price reflects a recognition that recovery will take time and that provides a long-term opportunity in the stock.
But while long-term investors will likely do well by simply buying and holding onto the stock, over at Maximum Income, we have a better plan…
A Better Way To Trade…
Aside from buying and holding shares of CCL, we can use an options strategy to generate income from our position. We can do this by selling covered calls. But don’t let the word “options” scare you off… this is one of the easiest and safest ways to generate high income on a regular basis.
As you may know, a call option gives the buyer the right to purchase 100 shares of a stock at a predetermined price (the strike price) at any time before the expiration date. A covered call strategy involves selling calls on a stock you already own. When you sell a call option, you collect a premium for accepting the obligation to sell the stock if it should rise above the option’s strike price. Risk is minimized because your obligation is “covered” by the fact that you already own the shares.
Once you sell a covered call, one of two things can happen — either the underlying stock rises in price or it falls.
If it declines in price, your shares will decrease in value, but you have the option premium to counter the loss. In other words, if the shares fall, you’re better off selling covered calls than simply holding the stock.
Meanwhile, as long as the shares stay under the strike price, the option expires worthless for the buyer. That’s not necessarily a bad thing. When an option expires worthless, it means you can sell another call on the stock, capturing another income payment. That’s why we only recommend selling calls on high-quality stocks that we would be happy to own for the long term.
And if the stock’s price rises, that’s good too. While your gains will be capped with this strategy, anything between the price at which you originally bought the shares and the option’s strike price is pure profit, in addition to the cash earned when you originally sold the option.
Once you’ve mastered the technique, you’ll see how this could change the way you invest and trade forever.
That’s how powerful this strategy is: It can drastically improve the way you make money in the markets forever. That goes for conservative income investors and aggressive traders alike.