One Options Trader Sails into a Royal Caribbean (RCL) Collar Trade

Royal Caribbean (RCL) made headlines this month as its Oasis of the Seas, reportedly the world’s largest cruise ship, arrived in Florida. Today one option investor took an interest in the company by trading a massive collar spread. Shortly after noon Eastern Time, the investor bought 20,000 June 20 puts and sold 20,000 June 30 calls. Heading into today’s trading, the 20-put strike was home to just 129 open puts and the 30-strike call was home to just 42 open contracts, indicating that today’s volume was definitely traded to open.

Specifically speaking, the customer sold the June 30 calls for around $1.70 (a nickel off the bid price at the time) and bought the June 20 puts for around $2.25 (also a nickel above the bid price). In total, the investor paid about 55 cents for the collar position, making the entire position worth about $1.1 million. This strategy is referred to as a “collar” because if the investor is long stock (which we assume), they have effectively “collared” their returns with this spread.

If the stock goes below 20 at expiration, the puts kick in and the customer does not lose any more money. In exchange for that protection, the customer has sold off the upside in the form of the 30 calls. If the stock is above 30 at June expiration, the investor will be called away on their shares, thus capping his or her gain.

This collar trade also gives us a chance to look at skew, which is a term option traders use to describe the difference in implied volatilities from one strike to the next in the same expiration month. For example, in this trade, the price of $2.25 in the June 20 puts translates to an implied volatility of roughly 60 with the stock at $24.10, while the price of $1.70 in the June 30 calls translates to an implied volatility of closer to 51. The put, however, is out-of-the-money by just $4.10 while the call is out-of-the-money by $5.90.

Today’s collar action in RCL does not mean investors should be hasty with any existing holdings in the shares. But it is interesting to note that one investor is willing to sacrifice any upside north of the 30 strike during the next seven months in exchange for downside protection below the 20 level.